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VMC: What Is Asset Turnover Ratio?

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Definition of Asset Turnover Ratio

  • The asset turnover ratio is used to measure the efficiency of a company.
  • The higher the ratio, the more efficient the company is. 
  • The asset turnover ratio looks at how efficiently a company uses its assets to produce sales.

What is the Formula for Asset Turnover Ratio?

  • The asset turnover ratio can be calculated by dividing the revenue by the average total assets.

Revenue ÷ Average Total Assets

  • The average total assets can be calculated by adding the beginning and ending total assets and dividing them by 2.

Asset Turnover Ratio in Practice 

  • Alex sells TV’s and creates a revenue of $500,000. His total assets at the beginning of the period are worth $300,000 and are worth $290,000 at the end of the period. What is the asset turnover ratio?
  • 500,000 ÷ ((300,000 + 290,000) ÷ 2) = $1.70
  • Therefore, for every dollar Alex’s company has in assets, the company generated $1.70 in sales.

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.