# Asset Turnover Ratio (ATR)

Asset Turnover Ratio can be defined as the value of sales generated for every rupee invested in assets for a given financial year. It is used to measure a firm’s efficiency.

## Formula of Asset Turnover Ratio

Asset Turnover Ratio = Total Sales / Average Investment in Assets

Total sales figure can be obtained from the income statement. This is the revenue generated from sales for a given financial year.

Average investments in assets can be obtained from the balance sheet. It is given by:
Average Investments = (Assets at the Beginning of the Period + Assets at the end of the Period)/2 ## Example Explaining Asset Turnover Ratio

Let us assume a company X. For FY 2010-11, it generated sales of 10 Millions. On the other hand, it had assets worth 1 at the beginning of the period. Towards the end of the period, its assets were  2 Millions.

From the given information, we can deduce Asset Turnover Ratio as follows:

Total sales = 10 Millions

Assets at the beginning of the period = 1 Million Assets at the end of the period  =          2 Millions

Average Investment                   =          (1+2)/2

Average Investment                   =          1.5 Millions

Thus, Asset Turnover Ratio       =          10 Millions / 1.5 Millions

=          6.67 Times

## Analysis and Interpretation of ATR

What this means is that, for every \$ that the company invests in assets, it generates sales of 6.67. Higher is this figure, better is the management of the company. This is because ideally a company wants to maximize its returns for every investment it makes. If the investment made does not get translated to increase improvement in top-line, and thereby improvement in bottom-line, there is some problem with the decisions taken by management.

Consider two companies X and Y, one with Asset Turnover Ratio of 6.67 and another with Asset Turnover Ratio of 3 respectively. Based on these numbers only, company X has made better investment decisions as compared to company Y.

## Advantages of Asset Turnover Ratio

One of the primitive ratios used to measure a company’s performance is the sales generated. Higher the sales better is the company. But this may not give a true picture. Company X may have sales of 10 Millions and Y may have sales of 20 Millions. X may have invested 1 Million on assets, and hence its ATR is 10. Y may have invested  5 Million. So, it’s ATR is 4. Thus, although Y has double the sales, it still may not be as efficient as X because it’s investment fetches 4 times sales, whereas X’s investment fetches 10 times sales. Thus, ATR may give you a better view as compared to the sales figure.

Generally, it is observed that companies with low-profit margins have higher Asset Turnover Ratio. This is because low-margin companies tend to focus more on volume rather than per unit profit. Hence, they use their investments more rigorously.

## Disadvantages of Asset Turnover Ratio

ATR does not measure how well a company is earning profits. It only measures how well a company is generating sales. Higher sales may or may not get translated to increase in profits. This is where ATR differs from Return on Assets (ROE).

## Caution

It is always advisable to compare ATRs of companies within the same sector. Also, ATR on its own may not be a holistic ratio. It must be used in combination with various other ratios to get a better picture of the functioning of a company.

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