What is a Good Total Asset Turnover Ratio
What is a good total asset turnover ratio?
The basics of every business do not revolve only around the capital but also the assets owned. However, when measuring a company’s turnover ratio, it is expected to know when it is good and otherwise. So, what is a good asset turnover ratio? Read on to find out.
What is the total asset turnover ratio?
Total asset turnover or asset turnover is a factor that represents a measure of a company’s appropriate asset management to increase or product sales. This is a ratio factor that shows how well a company uses the assets at its disposal in fueling sales. It is important for measuring the rate of success of a company.
Simply put, the total asset turnover ratio measures a company’s efficiency in using its assets to generate revenues. However, the value in this ratio can be either good or bad and this ratio is useful for productivity analysis.
In accounting, assets are anything with a value that is owned by a business and can be liquidated into cash. By equation, this is represented as, asset = liabilities + stakeholder equity. Where liabilities are the expenses, a company incurs during resources management or production. The stakeholders’ equity represents the total amount of capital remaining for stockholders after all liabilities have been paid.
What is a good total asset turnover ratio (TATR)?
The total asset turnover calculation can be annually (per year) although it can be calculated otherwise. The time frame can be adjusted for a shorter or longer time.
In the retail business, when the value of the total asset turnover ratio exceeds 2.5, it is considered good. However, for a company, the value to aim for ranges between 0.25 and 0.5. These values show that there is no definite measure for all sectors and the ratio can differ across sectors.
The higher the value of a company’s total asset turnover ratio, the higher the productivity level. Also, this value shows that the company’s assets are well utilized for sales increment. This factor can further interest and attract investors to the business causing an expansion or enlargement.
The ratio value is higher in retail businesses as they have a lower asset base and a larger sales record. Having that they have fewer assets, there is less maintenance to worry about and less labor to employ.
Similarly, firms like real estate and construction businesses have larger asset bases and lower sales. Hence, the liabilities, which include asset maintenance, the total asset turnover ratio will be lesser.
Since, there is no definite value for every business, considering the variation in every business model, high values are preferred. A low or bad total asset turnover ratio will mean that a business is not utilizing its assets appropriately. This could be a sign that a business needs more efficient methods of using these assets. If there are no other means, selling these assets can also be a good idea.
Be aware that the asset turnover ratio does not access the profit margin of a company. However, it does assess the revenue of the company relative to the assets and not the profit made. This stands to distinguish between return on assets (ROA) and asset turnover ratio. This is because the return on assets (ROA) considers the net profit or income relative to the assets.
How to calculate the total asset turnover ratio?
Are you interested in finding out how to calculate the total asset turnover ratio? Well, you are in luck, read on. Calculating this ratio is simple and here’s how:
Total asset turnover = Net sales/Total assets
Indicated above is the formula used for the calculation of a company’s total asset turnover ratio. Experimentally, a company could have an asset worth of $2million and an annual net sale of $250,000. Calculating the turnover ratio will be 25,000/2,000,000, which gives a ratio value of 0.125 or 12.5%. To a retail business that requires small base assets, this value represents average efficiency.
However, for a firm with bigger assets, the expected ratio is lower since most have lower sales and larger assets. Hence, a ratio of value 0.25 to 0.5 is considered as a ‘good’ total turnover asset.
Therefore, it is correct to agree that the value that represents a good turnover ratio can vary. So, what is a good total asset turnover ratio? It is a ratio value that determines how efficiently business assets have been used in maximizing sales.
The importance of knowing the total asset turnover ratio
Why should a company be aware of its current total turnover ratio? This is simple, as explained in other sections above; this gives a preview of a company’s financial status. As earlier stated, it is mainly calculated annually but can be changed according to needs.
This ratio helps to make reasonable comparisons with companies of similar sectors and measure productivity. Comparison with retail or unrelated sectors will lead to wrong results.
Knowing the asset turnover ratio helps to find out the progress and limitations of a company’s finances.
Increasing your company’s asset turnover ratio
Is it not obvious? Increasing the turnover ratio of a company is dependent on sales. The higher the sales compared to the asset, the high the ratios. Hence, to get a higher ratio for your company, it is advisable to focus your assets on increasing sales.
For a business to be sustained, having the right assets in play is a boon. However, these assets are meant to facilitate growth, inefficiency will result in the other. Therefore, correcting the inefficiency is the first step to increasing the ratio.
Conclusion
In business, growth is expected to have foresight on the future of a company. Therefore, a company’s growth and management are measured using a factor known as the asset turnover ratio. Finally, what is a good total asset turnover ratio? It is having high sales over total asset value. The value varies by business models but a value between 0.25 and 0.5 is agreed as good for firms. While a value above 1 is believed to be good for retail business and other low asset companies.