Back To Course

Financial Accounting: Help and Review18 chapters | 232 lessons

Watch short & fun videos
**
Start Your Free Trial Today
**

Start Your Free Trial To Continue Watching

As a member, you'll also get unlimited access to over 70,000 lessons in math, English, science, history, and more. Plus, get practice tests, quizzes, and personalized coaching to help you succeed.

Free 5-day trial
Your next lesson will play in
10 seconds

Lesson Transcript

Instructor:
*Tina Van Rikxoord*

The asset turnover ratio is one of the items that companies and potential stockholders look at in order to figure out how well a company's money is working for it. In this lesson, we will learn how to calculate a company's asset turnover ratio.

Every business has **assets**, or things that the company owns and uses in its business in order to make money. These assets can include not just tangible items like cash, supplies, buildings, and equipment, but also intangible assets like trademarks and copyrights. The **asset turnover ratio** is a number that shows how much revenue is being earned for every dollar the company has spent on assets. It represents how well a company uses its assets to make money.

The formula for figuring the asset turnover ratio is:

To see how to use this formula, let's look at the example of a company that makes jewelry. We'll call it Linda's Jewelry, and Linda is the owner. To make her jewelry Linda needs tools like beads, wire, string, glue, and work tables. She will also need computers and software to keep track of sales, inventory, and other administrative items. All of these items are considered to be assets.

Let's say the company just started in 2013 and had $16,100 worth of total assets in its first year. Since the company has only been in business for one year, we can use the **total assets** listed on the balance sheet as the average total assets.

Average Total Assets for 2013 = $16,100

If the company has been in operation for at least two years, you will need to calculate the average of the total assets for the past two years. Let's say that in its second year of operation, Linda's Jewelry had $20,000 in assets.

To calculate the average total assets, add the total assets for the current year to the total assets for the previous year,and divide by two.

Average Total Assets for 2014 = (Assets for 2014 + Assets for 2013) / 2

Average Total Assets for 2014 = ($20,000 + $16,100) / 2

Average Total Assets for 2014 = $18,050

Now that we have figured out the average total assets, we can use it in the formula.

The second piece of information that we need for the formula is the company's **net revenue**, which is the sales revenue after deducting various expenses. Net revenue is taken directly from the income statement. The net revenue used in the formula is generally called total revenue on the income statement. Let's say that in its first year Linda's Jewelry earns $35,000 in net revenue. In the second year, Linda's Jewelry earns $65,000 in net revenue.

Now, let's say Linda wants to understand how well the assets the company has purchased are contributing to creating that income. She would calculate the company's asset turnover ratio to find out. So, for Linda's Jewelry:

Asset Turnover Ratio for 2013 = $35,000 / $16,100

Asset Turnover Ratio for 2013 = 2.14

Asset Turnover Ratio for 2014 = $65,000 / $18,050

Asset Turnover Ratio for 2014 = 3.60

The asset turnover ratio of a company is a good way to gauge how a company's assets are contributing to or detracting from its revenue. Generally, the higher the asset turnover ratio the better the company is using its assets; however, exactly what ratio is considered good depends upon the industry. You wouldn't compare a jewelry company's asset turnover ratio to that of a car rental company!

Looking at the example of Linda's Jewelry, we see that in its first year Linda's Jewelry earned $2.17 in sales revenue for every $1 spent on assets, and in the second year, the company increased its efficiency to earn $3.60 per $1 spent on assets. While the ratios for Linda's Jewelry company may seem positive, we would need to compare this number to the asset turnover ratio of other companies in the jewelry industry to be sure. If the average jewelry company was earning $1.50 in sales revenue for every $1 spent on assets, Linda's Jewelry would be doing very well; on the other hand, if the average jewelry company earned $4.80 in sales revenue for every $1 spent on assets, Linda would need to look for ways to manage her assets better.

You can look up the financial statements of other companies in your industry to obtain the information needed for the asset turnover ratio formula and then calculate it yourself.

Let's review. The **asset turnover ratio** determines how much money a company is making for every dollar that it spends on its assets, or the equipment that a company owns and utilizes in order to function. The formula for asset turnover ratio is this:

**Net revenue** is taken directly from the income statement, while **total assets** is taken from the balance sheet. If a company is in operation for more than one year, the average of the assets for each year must be calculated.

Generally, when a company has a higher asset turnover ratio than in years prior, it is using its assets well to generate sales. However, a company must compare its asset turnover ratio to other companies in the same industry for a more realistic assessment of how well it's doing.

To unlock this lesson you must be a Study.com Member.

Create
your account

Already a member? Log In

BackDid you know… We have over 95 college courses that prepare you to earn credit by exam that is accepted by over 2,000 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

You are viewing lesson
Lesson
12 in chapter 5 of the course:

Back To Course

Financial Accounting: Help and Review18 chapters | 232 lessons

- The Differences Between Accrual & Cash-Basis Accounting 6:20
- Using Accrual Accounting to Make Financial Statements More Useful 5:47
- Accrued Expenses & Revenues: Definition & Examples 4:30
- Preparing Financial Statements 7:35
- Temporary & Permanent Accounts: Definition & Differences 4:57
- Real Accounts vs. Nominal Accounts: Definition, Differences & Examples 4:55
- Debt Financing: Definition, Types, Advantages & Disadvantages
- Deficit Financing: Definition & Concept
- Differential Cost in Accounting: Definition, Analysis & Formula 5:21
- Direct Labor: Definition & Cost Formula
- Dividend Payout Ratio: Definition, Formula & Analysis
- How to Calculate Asset Turnover Ratio: Formula & Example 5:24
- How to Calculate Depreciation Expense: Definition & Formula 8:08
- How to Calculate Free Cash Flow: Formula, Analysis & Example
- How to Calculate Future Value: Formula & Example 4:55
- How to Calculate Gross Profit Margin: Definition & Formula 3:24
- How to Calculate Interest Expense: Formula & Example 4:31
- How to Calculate Internal Rate of Return: Definition & Formula
- How to Calculate Net Present Value: Definition, Formula & Analysis 6:04
- How to Calculate Net Profit Margin: Definition & Formula 4:58
- How to Calculate Net Working Capital: Definition & Formula 5:06
- How to Calculate Owner's Equity: Definition, Formula & Examples 4:09
- How to Calculate Payback Period: Method & Formula 6:00
- How to Calculate Profit Margin: Definition & Formula
- How to Calculate Risk Premium: Definition & Formula
- How to Calculate Sales Revenue: Definition & Formula 3:37
- How to Calculate the Break Even Point - Definition & Formula 6:12
- How to Calculate the Degree of Operating Leverage: Formula & Example
- How to Calculate the Rate of Return: Definition, Formula & Example 5:04
- How to Calculate the Return on Equity: Definition, Formula & Example 3:31
- How to Calculate Yield to Maturity: Definition, Equation & Example 5:14
- Unearned Revenue in Accounting: Definition & Examples 4:46
- Go to Preparing Financial Statements: Help and Review

- Developing Adaptable Teams & Employees
- Effective Delegation Skills for Supervisors
- ORELA Essential Academic Skills: Practice & Study Guide
- Math 108: Discrete Mathematics
- ORELA Elementary Education - Subtest II: Practice & Study Guide
- Developing Adaptable Employees
- Proactive Employees & Team Problem Solving
- Organizational Change Management
- Identifying Competencies & Training Needs
- Relations Between Labor & Management
- How to Request a CLEP Transcript
- CLEP Exam Dates & Testing Center Locations
- CLEP Scoring System: Passing Scores & Raw vs. Scaled Score
- Continuing Education Opportunities for Molecular Biology Technologists
- WV College & Career Readiness Standards for Social Studies
- Common Core State Standards in Ohio
- Resources for Assessing Export Risks

- Required Rate of Return (RRR): Formula & Calculation
- Fixed Phrases: Definition, Examples & Practice
- Why Do Workers Join Unions? - Benefits & Reasons
- Rigid Motion in Geometry
- Electronic Health Records & Evidence-Based Medicine
- Symmetry in Insects: Types & Examples
- Native American Mathematics: History & Mathematicians
- Behavioral Health Quality: Framework & Measurement
- Quiz & Worksheet - Animal Population Size
- Quiz & Worksheet - Psychoanalyst Anna Freud
- Quiz & Worksheet - Potassium Chromate
- Quiz & Worksheet - Understsanding Transaction Processing Systems
- Quiz & Worksheet - Decomposing Numbers
- Tourism Marketing Flashcards
- Tourism Economics Flashcards

- AP Chemistry: Help and Review
- MTTC Reading Specialist: Practice & Study Guide
- CEOE Oklahoma General Education Test: Practice & Study Guide
- Human Growth and Development: Certificate Program
- TASC Social Studies: Prep and Practice
- Essay Organization, Development & Presentation
- America in the 1970s
- Quiz & Worksheet - Formal Research Methods
- Quiz & Worksheet - Language Skill Development in Early Childhood
- Quiz & Worksheet - Therapeutic Approaches in Psychology
- Quiz & Worksheet - Nitrite Structure & Formula
- Quiz & Worksheet - Features of a Curriculum Guide

- The Retinex Theory of Color Vision
- Ischemic Cardiomyopathy: Definition, Symptoms & Causes
- States of Matter Experiments for Kids
- Finding Illinois TAP Testing Centers
- Which is Easier: GMAT or GRE?
- How to Use the GED Math Prep Course
- How Hard is the GMAT?
- How Much Does It Cost to Homeschool?
- Maximizing Performance on SAT Subject Tests
- Writing Prompts for Kids
- Letter Writing Lesson Plan
- How to Prepare for the LSAT

Browse by subject