The total asset turnover ratio - definition and formula

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

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.
Watch the Webinar Recording

Start Your Free Trial

Let informed predictions and powerful reporting guide your business. Be ahead of the curve with Futrli.

Get business advice here

Our blog holds tips, how to’s and general business advice.

Futrli News

Futrli's February 2024 Release

This is some text inside of a div block.

Heading

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat.

Futrli News

Futrli's February 2024 Release

Accountants

3 Apps to beat accounting blues and scale your firm

Chris Downing catches up with three accounting app innovators to discuss the apps that they have developed that directly help accountants.

Accountants

Where most prediction software falls short

Tread carefully when looking for prediction software. Find out how to dig deeper into your predictions with the tools that count.

Small Businesses

Cash is King! 4 ways to keep your cash flow healthy.

Cash flow is essential to your business’ survival. Read our top 4 tips for taking control of your cash flow.

Small Businesses

10 Common Cash Flow Forecast Hurdles

If there’s one thing that all small and medium-sized enterprises should prioritise, it’s their cash flow. Read on to find out the top 10 most common issues.

Accountants

Empowering Accountants: How to Embrace Uncertainty with Futrli

The future is far from certain. Find out how Futrli helps accountants wade their way through murky, grey, “This might happen”-type scenarios.

Small Businesses

Inflation affecting your hospitality business? Take back control with these three steps.

Acting quickly is key to ensure you can ride out the incoming storm. Find out more in this article.

Small Businesses

Why cash flow forecasting helps businesses survive downturns in trade

Learn how cash flow forecasting is crucial for surviving slower trading periods.

Accountants

The 7 reasons why SMEs struggle with cash flow management

Find out the 7 major reasons why your clients’ businesses struggle to achieve a positive, healthy, consistent cash flow.

Accountants

Take clients from compliance to scenario planning in five steps

Scenario planning helps your clients imagine different environments or realities in the future, guiding the plans and decisions your clients make.

Accountants

Flash reports and why to build them

This short guide covers what Flash Reports are and how you could use them as a speedy solution for your clients’ reporting needs.

Small Businesses

Head of Accounting and Futrli COO discuss challenges and solutions for small businesses.

Read Dan and Helen’s thoughts on how SMEs can protect themselves during what is set to be a challenging year.