Assets Turnover Ratio is a type of Turnover Ratio that determines a company’s return on its assets relative to its net sales. In other words, this ratio tells how good a company is in using assets to generate sales.
$$Assets\quad Turnover\quad Ratio=$$$$\frac { Net\quad Sales }{ Average\quad Fixed\quad Assets } $$
Net Sales = Total Sales During the Period – Returns - Allowances
Where,
$$Average\quad Fixed\quad Assets=$$$$\frac { Opening\quad F.\quad Assets\quad +\quad Closing\quad F.\quad Assets }{ 2 } $$
Assets Turnover Ratio tells the number of times the average Assets are sold in a period, it helps companies plan their productions.
⇨ Rs. 1200000.00
$$Average\quad Fixed\quad Assets=$$$$\frac { Opening\quad F.\quad Assets\quad +\quad Closing\quad F.\quad Assets }{ 2 } $$
⇨Rs. 400000.00Average Assets = (500000 + 300000) / 2$$Assets\quad Turnover\quad Ratio=$$$$\frac { Net\quad Sales }{ Average\quad Fixed\quad Assets } $$
Net Sales = Total Sales During the Period – Returns - Allowances
Where,
$$Average\quad Fixed\quad Assets=$$$$\frac { Opening\quad F.\quad Assets\quad +\quad Closing\quad F.\quad Assets }{ 2 } $$
- Significance and InterpretationNote: Average Assets are calculated after removing the effect of Depreciation.
- The above formula may be used to calculate Fixed Assets Turnover Ratio or Current Assets Turnover Ratio by replacing Averages Assets in the formula by Average Fixed Assets/Average Current Assets.
Assets Turnover Ratio tells the number of times the average Assets are sold in a period, it helps companies plan their productions.
- High Assets Turnover Ratio indicates that a large amount of sales is generated using a small number of assets, which indicates that the company is highly efficient in utilizing its assets.
- However, Higher Fixed Asset Turnover Ratio may also be high because the company has sold off its assets and outsourced its operations and has maintained the same amount of sales.
- Low Assets Turnover Ratio indicates that the company is not utilizing its assets efficiently. The company may have invested in a few assets which are not able to generate high sales for the company.
- It must be noted that while comparing two companies on the grounds of Assets Turnover Ratio, they should be of the same industry.
Examples
Example 1:
Use the following data of ABC Ltd, to calculate its Assets Turnover Ratio.- Total Sales during FY = Rs. 1500000.00
- Total Return on Sales During FY = 20% of Total Sales
- Assets at the Beginning of FY = Rs 300000.00 (adjusted for Depreciation)
- Assets at the End of FY = Rs 500000.00 (Adjusted for Depreciation)
Solution:
Net Sales = Total Sales – Returns⇨ Rs. 1200000.00
$$Average\quad Fixed\quad Assets=$$$$\frac { Opening\quad F.\quad Assets\quad +\quad Closing\quad F.\quad Assets }{ 2 } $$
Assets Turnover Ratio = Total Sales / Average Assets
⇨1200000 / 400000
⇨ 3
Hence, Assets Turnover Ratio = 3
