Calculating Asset Turnover Ratio

From The Hoss's Mouth

Asset turnover ratio is another financial tool investors use in their analysis of a company's efficiency. It calculates a business's effectiveness at using its assets in producing sales or revenue. The formula for this simple calculation is as follows:

Asset Turnover = Revenue/Assets (Assets in the example below are averaged for the period being calculated)

Let's take a look at Amazon for an example:

In 2005 Amazon had total assets of $3,696,000,000

In 2006 Amazon had total assets of $4,363,000,000

Average Assets = ($3,696,000,000 + $4,363,000,000) /2 = $4,029,500,000

Amazon's Total Revenue for 2006 was $19,166,000,000

Amazon's 2006 asset turnover ratio: $4,029,500,000 /$19,166,000,000 = .21

What this tells the investor is that for every dollar of assets Amazon had in 2006, they sold $.21 worth of product and services.

Money Magazine Hoss must point out that when comparing asset ratios it is important to compare companies that are in the same business industry. Generally, the company with the highest ratio is the most efficient.

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