Asset turnover reflects the total revenue of every dollar from assets owned by a company. Calculating asset turnover requires you to divide the total revenue by the average assets for the period you study.
In calculating asset turnover you need to remember to average the beginning assets and the ending assets. For instance, the average asset of a BBB company with $1 assets in 2000 and $10 assets in 2001 are $5 for $1+$10/2 = $5.
The Formula
To calculate asset turnover you need to use this formula.
Asset Turnover = Total Revenue / Average Assets for Period
For example, a BCB company has $28,355,000,000 in 2000 and $31,691,000,000 in 2001. The average assets of that company is $30,023,000,000 ($28.355 billion + $31.691 billion / 2 = $30.023 billion).
If you calculate the turn rate with the asset turnover formula above, you will get a .76138 turn rate. That means every $1 asset of BCB company in 2001 is worth $.76 of goods and services.
The Rules for Calculating Asset Turnover
There are a few rules you need to remember whenever you calculate the asset turnover of a company. First, asset turnover represents the efficiency of a company uses its assets. That means the higher the number, the better it is. Yet, you need to make sure that you compare a business to its industry.
Never compare companies from the unrelated business since they have different economics, customs, market forces, characteristics, and market needs.
Second, higher asset also means low-profit margin and vice versa. The reason is that a lot of businesses use a low margin and high volume approach resulting in rapid growth.
Third, there is also a situation where the management intentionally lower the company’s asset turnover since their products are undervalued. Thus, they think that selling is disadvantageous at that period.
