The asset turnover ratio is a financial ratio used to measure a company’s ability to generate revenue from its assets. It is calculated by dividing a company’s net sales by its total assets.
The formula for asset turnover ratio is as follows:
Asset Turnover Ratio = Net Sales / Total Assets
- Net Sales = Total sales revenue minus any returns, allowances, or discounts
- Total Assets = The sum of all assets on the company’s balance sheet
This ratio helps investors and analysts to understand how efficiently a company is using its assets to generate revenue. A high asset turnover ratio indicates that a company is using its assets efficiently to generate sales, while a low ratio may suggest that the company is not effectively using its assets to generate revenue.