The average total asset value will be impacted by the depreciation policy, impairment, inventory provision and so on. It is simply calculated by dividing total sales by the average Assets turnover ratio measures the company efficiency to generates sales from its assets, the ratio Lower the ratio also indicates that there is some issue at the management level or production level, which. Impact by accounting policy: Even the two company has a similar sale and total assets, the ratio may be different due to accounting policy.They want to have a consistent ratio that allows them to enjoy the performance bonus. They will not invest even it has long-term benefits to the company. Discourage management to make the new investments: Management will hesitate in making the new investments as it will increase the total asset and decrease the ratio.Not reflect with profit: Even company has high sales compare to available assets, it does not mean that they are making a profit that benefits shareholders.So their assets turnover ratio will be quite low. However, energy company needs to invest a huge amount of assets in order to operate. Service companies require a very little asset, so it has a very high ratio. Can’t compare in various industries: It is very hard to compare this ratio across companies in different industries.The sudden drop in the ratio may show that the company assets lose their ability to generate income. Asset impairment indication: it can be used as a tool to provide the indication of asset impairment.Before buying new assets, management needs to look at the benefit asset provide and it will help to reduce unnecessary spending. Focus on the dollar value generated by the asset: The company already owns the assets, so they need to be in a position that provides benefit to the company.Allow the comparison: It is very common for investors to compare one company to another before making any decision.A high asset turnover ratio is such a good sign for them.
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Assets Turnover Ratio Formula \ Advantages of Assets Turnover Ratio The income should be higher than the expenses which allow the business to grow and increase shareholders’ wealth. It is calculated by dividing net sales by average total assets. The company expects to use the assets to generate more income and expand the business. Asset turnover ratio determines the ability of a company to generate revenue from its assets. It is the percentage that gets from the net sale over the total assets.Īssets are the resources that control and own by the company which raises from shareholders’ capital or debt financing. Advantages and Disadvantages of Assets Turnover RatioĪsset turnover ratio is the measurement of the company’s efficiency in using available assets to generate the sale.
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