Asset Turnover Ratio- Meaning, Formula, Calculation & Interpretations

This tutorial will cover the concept of Asset Turnover Ratio from the ground up, including its formula and step-by-step calculations. Following that, we will use the Colgate Case Study to calculate the Asset Turnover Ratio in excel and interpret the results.
You can download the Colgate Asset Turnover Ratio template from this link -
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What is Asset Turnover Ratio?
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The Asset Turnover Ratio measures how much revenue a company generates based on its total assets. This ratio helps determine whether the company is generating sufficient revenues to justify holding a large amount of assets on its balance sheet.

Formula
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Asset Turnover Ratio Formula = Net Sales / Average Total Assets

Interpretation of Asset Turnover Ratio
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- If the asset turnover ratio is less than one, the company is in trouble since its total assets are unable to generate enough revenue at the end of the year. However, this is based on a presumption. For example, the asset turnover of the industry in which the firm operates is less than 0.5, while this company's ratio is 0.9, then despite its lower asset turnover, this company is performing well.
- If the asset turnover ratio is greater than one, it is always a favorable sign. Because this indicates that the company is self-sufficient in terms of revenue. There is, however, an exception. A company in the retail industry, for example, will have fewer total assets. As a result, most organization's average ratio is always more than 2 in this industry. In this situation, a 1.5 asset turnover indicates that the company isn't doing well.

For more details, you can refer to our article - https://www.wallstreetmojo.com/asset-...

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