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

## Formula of Asset Turnover Ratio

*Asset Turnover Ratio = Total Sales / Average Investment in Assets*

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

Average investments in assets can be obtained from the balance sheet. The formula for it is as below:*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 Million. 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 Million.

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 Million

Average Investment = (1+2)/2

Average Investment = 1.5 Millions

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Thus, ATR = 10 Millions / 1.5 Millions

= 6.67 Times

## Analysis and Interpretation of ATR

This means that, for every $ that the company invests in assets, it generates sales of 6.67. Higher is this figure; the 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 the top-line and thereby improve the bottom line, there is some problem with the decisions taken by management.

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

Refer to How to Analyze and Improve Asset Turnover Ratio? for more details.

## Advantages of Asset Turnover Ratio

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

Generally, it is observed that companies with low-profit margins have a 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 an increase in profits. This is where ATR differs from Return on Assets (ROE).

## Caution

It is always advisable to compare the 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.

Also, read other Types of Efficiency Ratios.