Return on assets ratio essentially provides an assessment of what the company does with what it’s got; it measures
every dollar earned against each dollar’s worth of assets. Another way to assess how well business assets are being utilized is to test how much revenue is generated for every dollar of assets. This is calculated by dividing (the amount of) revenue in dollars by average total assets.
Asset Turnover Formula:
Asset turnover measures the ability of a company to generate sales revenue from asset investments – the higher the number the better.
Asset Turnover Example:
Let’s compare the results from periods 1 and 2 for a company as follows.
In period 1, the business generated $3.24 of revenue for every dollar tied up in assets. In period 2 however, the return dropped to $3.21 in revenue for every dollar (tied up in assets). What does this tell us? If the business invested less cash in assets but generated more revenue this would mean that the business is “selling more with less”. The higher the revenue per dollar tied up in assets the more efficiently the assets are being utilized. A more accurate way to calculate the asset turnover is to average the assets for the year.