The total asset turnover ratio - definition and formula

Read our introductory guide to the total asset turnover ratio and how to calculate it.

Hannah Dawson

Your business's working capital is a cornerstone of financial success and growth. While calculating cash flow is crucial, it is also important to understand your company's total asset turnover ratio. This is a metric showing your organization's ability to use assets to generate sales. This is why we've compiled this short guide to the total asset turnover ratio and how to calculate it.

Man typing on laptop
Your business's working capital is a cornerstone of financial success and growth.

Asset turnover - explained

Your company's asset turnover ratio refers to the value of your business’s sales revenue relative to the value of your company’s assets. This means it can show how efficiently your company utilizes its assets to generate income. Most businesses calculate their total asset turnover ratio every year, however, you could also choose a shorter timeframe.

People working in office
Your company's asset turnover ratio refers to the value of your business’s sales revenue relative to the value of your company’s assets.

How to calculate the asset turnover rate for your business

The formula to calculate your company's asset turnover rate is as follows: Total Asset Turnover = Net Sales / Total Assets.

Of course, this requires you to identify your business's total assets and net sales. The formulas for those are as follows:

  • Net Sales = Gross Sales – Returns – Discounts – Allowances
  • Total Assets = Liabilities + Owner’s Equity

Example

Company X makes GPB 300,000 in net sales. It has GPB 1,500,000 in total assets. The formula for their asset turnover rate is as follows: 300,000 / 1,500,000 = 0.20 x 100 = 20%.

Company X's assets can generate 20% of their net sales, relative to their value.

Shop window with "sale" written on it
The formula to calculate your company's asset turnover rate is as follows: Total Asset Turnover = Net Sales / Total Assets.

Interpreting your business's total asset turnover ratio

Put simply, high asset turnover ratios mean that a business is using its assets efficiently to generate revenue. A lower asset turnover ratio, on the other hand, indicates that a company is not efficient in generating revenue from its assets and generates more waste. Of course, the average assets turnover rate differs between industries. This means there is no defined figure for a “good” asset turnover ratio. For example, in the retail sector, an asset turnover ratio of 2.5 or more could be considered good, while a company in the utility sector can be happy with an asset turnover rate of c. 0.25-0.5.

If you are unhappy with your asset turnover rate, it is crucial to focus on improving net sales. This can be done through eg minimizing returns by stopping returns fraud and offering store credit instead of refunds. Of course, introducing new products or services is also likely to improve net sales.

Pile of coins
If you are unhappy with your asset turnover rate, it is crucial to focus on improving net sales.

We can help

If you’re interested in discovering more about this, or want to learn more about how you can grow faster with better, instant prediction information.

Learn more

More from the Blog

What Is A Balance Sheet? Definition, Template & Examples

Business finance can get complicated, but an up-to-date balance sheet means you always know what’s going on and where your money is.

Read story

Do Small Businesses Pay VAT?

VAT is a tricky area of business finances. Find out what VAT means for you and your small business, who should pay it, and why.

Read story

Types of Business Insurance for Small Businesses

Find out what types of business insurances small businesses should have, and which are required by law.

Read story