# Assets Turnover Ratio ### Reviewed by Subject Matter Experts

Updated on March 02, 2023

## Asset Turnover Ratio: Definition

The asset turnover ratio reflects the relationship between the value of the total assets held by a company and the value of its annual sales (i.e., turnover).

This ratio may seem unnatural, but it is helpful when assessing how efficiently the assets of a business are being used. After all, the main reason for holding an asset is to help the company achieve a certain level of sales.

An efficient company can deliver on its desired level of sales with a reasonable investment in assets.

By contrast, to achieve the same volume of business, a less efficient company will make a greater investment in assets (thereby incurring larger financial costs and, hence, recording a lower return on investment).

Industry averages provide a good indication of a reasonable total asset turnover ratio.

## Formula For Asset Turnover Ratio

To calculate the asset turnover ratio, use the following formula:

### Example

Consider the following data taken from 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

Required: Calculate and interpret the total asset turnover ratio of John Trading Concern for the year 2019.

### Solution

Total asset turnover ratio = Sales/Average total assets

= \$4,800,000/\$2,400,000* = 2

* (\$2,450,000 + \$2,350,000)/2

The asset turnover ratio is 2. This means that every dollar invested in assets generates \$2 in sales. Remember to compare this figure with the industry average to see how efficient the organization really is in using its total assets.

## Assets Turnover Ratio FAQs 