Asset Turnover Ratio Formula - Definition - Formula - Example - Interpretation - Importance

Here we will study about Asset Turnover Ratio Formula, Definition, Interpretation and finally its Importance in Accounting.

Asset Turnover Ratio Definition

Asset Turnover Ratio shows the efficiency of management in utilizing the assets of the company in generating revenues for the business.

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Now we need to understand What is Asset Turnover Ratio Formula?

It is the ratio which is obtained by dividing the Net Sales By Average Total Assets. Mathematically, we can write as:

Assets Turnover Ratio = Net Sales / Average Total Assets

Here Average Total Assets is = Opening Assets + Closing Assets / 2

Example: If the Net Sales From Income Statement is Rs. 60000, Opening Assets is Rs. 500000 and Closing Assets is Rs. 700000, then Assets Turnover Ratio can be calculated from the above Formula as:

Assets Turnover Ratio = 600000 / 600000 = .1

Here Average Total Assets = 500000 + 700000 / 2 = 600000

Interpretation / Analysis

From the answer of above example, we can say that for every Rs. 1 of Assets, the management of the company generated .1 Sales. If this ratio is increased to .2, then it means that the management of the company is more efficient than prvious performance in utilizing the assets to generate sales.

So, we can say that the higher the ratio is, the higher the company’s management is efficient in utilizing its assets to generate sales depending upon the particular type of industry in which the business is operating.

Importance / Significance

1. By knowing Assets Turnover Ratio, the company gets the clear picture about the efficient use of Assets in generating sales for the business.

2. Investors and Other Financial Institutions are interested in Assets Turnover Ratio when they are willing to invest or give credit to such company. If the Ratio is Relatively good, then they will invest or give credit, otherwise, they many refuse to invest or give credit to such kind of company operating in a particular type of industry.

So, it is all about Assets Turnover Ratio in Accounting.