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What is the asset turnover ratio calculation?

What is the asset turnover ratio calculation?
What is the asset turnover ratio calculation?

accounting ratios

What are the accounting ratios?
Accounting is used in most companies, as it is one of the things necessary for the operation of companies and to provide a clear picture that reflects the company’s financial situation, which can help in decision-making. Accounting ratios for business analysis, trends, and data are critical to decision-making.

Accounting ratios are a subset of financial ratios, which consist of a set of measures that are used to measure the profitability and efficiency of the company, according to its financial reports. Accounting ratios are used to compare the sequenced elements in the financial statements consisting of the income statement, balance sheet and cash flow statement. Common accounting ratios include dividend payout ratio, debt-to-equity ratio, asset turnover ratio, and quick ratio.

What is the asset turnover ratio calculation?

The asset turnover ratio is defined as one of the important accounting ratios that are used to measure the ability of companies to generate sales from assets by comparing net sales with average total assets. The company's sales or revenue compared to the value of the assets; As the higher the asset turnover ratio, the company's efficiency in generating revenue from assets increases.

And if the asset turnover ratio is low, this means that the company is not using assets efficiently to generate sales, so this ratio helps investors know how effective companies are in using assets to generate sales, and they can also use it to compare similar companies in the same sector. This percentage is affected by large asset sales as well as important purchases, so this percentage is usually calculated on an annual basis so that a higher percentage indicates more revenue.

Since the inventory turnover ratio varies from one financial year to another, investors must check the trend of the asset turnover ratio to ensure that the use of these assets is improving or deteriorating, and the asset turnover rate is also affected by some factors such as the company buying large assets as a result of anticipating growth higher, which leads to a decrease in the asset turnover ratio, as well as the sale of some assets as a result of the expectation of a decrease in growth, which will increase the asset turnover ratio in a temporary manner, and seasonality is one of the factors that affect the asset turnover rate, but during short periods of time that do not exceed general.

What is the purpose of calculating the asset turnover ratio?

The asset turnover ratio works to understand the extent of business productivity, as it shows the amount of revenue that companies generate from their assets such as buildings, inventory, cash, equipment, and accounts receivable.

If the asset turnover ratio increases, this indicates the effectiveness of the business, and the calculation of this ratio aims to measure the extent of profitability, as the return on assets measures how well the company uses its assets in order to achieve profit.

The purpose of using the asset turnover ratio is to assess the company’s fundamentals and provide correct information about the company’s performance during the financial year, by comparing the sequenced elements in the company’s financial statements. The use of the asset turnover ratio also aims to determine many of the following matters:
  • Determine the areas that reduce the profitability of the company.
  • Determining the effectiveness of management and production plans and changes to operational procedures.
  • Making a comparison between companies within the same sector, where the company shows the extent of its distinction among the companies, as well as showing the investors the best company.
The asset turnover ratio is one of the ratios that provides a clear analysis for employers or investors, and the asset turnover ratio is usually high in certain sectors such as the retail sector, which, despite its small assets, has a relatively high sales volume compared to the real estate sector, which has large assets but an average Low asset turnover.

How is the asset turnover ratio calculated?

The asset turnover ratio is the ratio between the value of the company's sales or revenues and the value of the assets. It is evidence of the company's efficient use of its assets in order to produce revenues, so the higher this ratio, this indicates the better performance of the company, and the asset turnover ratio can be calculated by using the average existing assets At the beginning and end of the fiscal year in addition to using the total number of assets.

The asset turnover ratio, also known as the total asset turnover ratio, is calculated by dividing net sales by the company's total or average assets; Net sales refer to the amount of revenue obtained after deducting sales returns and discounts, while average total assets refer to total assets at the end of the current fiscal year or the previous fiscal year, where the average assets or end-of-the-financial assets can be used. High asset turnover is more efficient than other competitors, and the asset turnover ratio is calculated using the following formula:

Inventory Turnover = Net Sales / Average Total Assets
A company reports total assets of $199,500 and total assets of $199,203 during the same financial period. During the same financial period, the company achieved sales of $325,300 with sales returns of $15,000. Accordingly, the asset turnover ratio is calculated as follows:
Asset Turnover = (325,300 - 15,000) / (2/(199,500 + 199,203)) = $1.5565.
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