In other words, this ratio measures the efficiency of a company in transforming its assets into sales, or how efficiently management is using the assets at its disposal to produce sales. In this sense, this ratio can help determine the productivity of a company’s assets.
It can be expressed as in the following formula:
For example, if a company sells $ 5 million worth in a given year using assets with total value of $10 million, then its asset turnover is:
asset turnover = $5 million / $10 million= 0.5
This indicates that during the year, every dollar invested in total assets generated 50 cents of sales. Put differently, the total assets of this company turn over almost 0.5 times during the year.
This ratio is also known as a total asset turnover.
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