What is Assets turn over ratio?
Assets turnover ratio shows the relationship between the value of total assets held by a company to the value of its annual sales (turnover). Total assets turnover ratio may appear to be unnatural ratio, yet it is helpful in assessing how well the assets of the business are being used. After all, any asset that a company holds, is held principally to assist the company to achieve a certain level of sales.
An efficient company can attain its desired level of sales with a lower investment in assets while a not so efficient company may perhaps unnecessarily make a greater investment in assets (and thereby incur larger financial costs and hence record lower return on investment) to achieve the same volume of business. Industry average provides a good indicator of what is a reasonable total assets turnover ratio.
Assets turnover ratio formula
The formula of total assets turnover ratio is given below:
The following data belongs to John Trading Concern:
Total assets at the beginning of the year 2019: $2,450,000
Total assets at the end of the year 2019: $2,350,000
Net sales made during the year 2019: $4,800,000
Calculate and interpret total assets turnover ratio of John Trading Concern for the year 2019.
Total assets turnover ratio = Sales/Average total assets
*($2,450,000 + $2,350,000)/2
The total assets turnover ratio of John Trading Concern is 2 which means every dollar invested in assets generates $2 in sales. The ratio should be compared with the industry’s average ratio to know about the efficiency of the concern in using its total assets.