Total Asset Turnover:

Asset turnover is a financial ratio that measures a firm's efficiency at using its assets in generating sales or revenue. It is a measure of how well the assets are being used to generate revenue. It also indicates the pricing strategy. It is also known as Asset Turnover Ratio.

Total asset turnover is calculated by the formula:

Asset turnover = Revenue/Assets

There are several general rules to be followed when calculating asset turnover. The asset turnover is used to measure a company's efficiency in using its assets. The higher the number, the better it is, although investors must be sure compare a business to its industry. It is fallacy to compare completely unrelated businesses. A relatively high ratio indicates intensive use of assets by the company. 

As compared to historical data for the firm and industry data, the lower total assets turnovers the more sluggish the firm's sales. This may indicate a problem with one or more of the asset categories composing total assets - inventory, receivables, or fixed assets. The small business owner should analyze the various asset classes to determine where the problem lies.

Let us take an example. Let us assume that during a year 2005 the net sales of the company XYZ is Rs. 21,00,000 and its total assets during the year is valued at Rs. 14,00,000. Hence the total assets turnover ratio for the company for 2005 was 1.5 (21, 00,000/14, 00, 000).

The industry average varies for each company, as some industries are more capital intensive than others. The companies should compare its total assets turnover with other companies in the same industry to analyze its efficiency.

Questions:

• What is total assets turnover?
• How is total assets turnover calculated?
• How does lower assets turnover affect the business?