Asset Turnover – What Does it Mean?
When measuring key performance indicators (KPIs) of your business’s operations, you should pay attention to asset turnover. Also known as asset turns, it provides insight into your business’s ability to use its current assets to generate sales or revenue. Unless you’re familiar with the term, you may be wondering what it is and how it’s calculated. In just a few simple steps, you can easily calculate your business’s asset turnover.
What is Asset Turnover and How is it Calculated?
Why Asset Turnover is Important
If your business has lots of assets — cash, property, equipment, accounts receivables, furniture, vehicles, etc. — you can use them to fund your business’s operations and, therefore, generate revenue.
Calculating your business’s asset turnover can help you gauge your business’s ability to perform such actions. With a high asset turnover, your business can generate revenue efficiently using its current assets. If your business has a low asset turnover ratio, on the other hand, you may struggle to convert assets into sales revenue.
Steps to Calculating Asset Turnover
To calculate your business’s ratio, perform the following steps:
- Add up your business’s total sales revenue from its income statement.
- Add up the value of your business’s current assets.
- Divide your business’s total revenue by its current assets.
If your business had $300,000 in total sales revenue and $150,000 in current assets, its asset turnover ratio is 2. This means that every $1 your business holds in assets can be used to generate $2 in sales revenue. Generally speaking, a high ratio is better than a low ratio since it indicates your business can efficiently use its assets to generate revenue.
How to Improve your Business’s Asset Turnover
There are several steps you can take to improve your business’s asset turnover, one of which is to increase your business’s total assets. Investing in assets will naturally increase your business’s asset turnover.
Keep in mind that a low ratio isn’t always bad. If you increase your business’s revenue by selling more products or services but retain your existing assets, it will result in a lower asset turnover.
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