What is Asset Turnover Ratio? How to calculate asset turnover ratio

Asset Turnover Ratio is an important indicator in financial economics that helps evaluate the performance of a business's assets. So what is Asset Turnover Ratio ? Join 1C Vietnam to learn in detail the Asset Turnover Ratio index, how to calculate the asset turnover ratio to apply to effective financial analysis and evaluation.

1. What is Asset Turnover Ratio?

Asset Turnover Ratio is a comparison index between total revenue and average total assets to evaluate the efficiency of using assets in the business process. Asset Turnover Ratio is calculated based on the ratio of total revenue to the average value of assets over a certain period of time. This ratio indicates the extent to which a company's assets are used to generate revenue.

2. Formula to calculate asset turnover ratio

Below is the Asset Turnover Ratio calculation formula that administrators can refer to:

Asset Turnover Ratio = Total Sales / ((Beginning Assets + Ending Assets) / 2)

In there:

• Total Sales: Total sales (revenue earned after deducting related amounts such as taxes, sales allowances, promotions,...).
• Beginning Assets: Total assets at the beginning of the period.
• Ending Assets: Total assets at the end of the period.

For example: Enterprise A operates in the manufacturing sector, reporting total assets at the beginning of the period of 500,700 USD and total assets at the end of the period of 500,300 USD. During that period, company A had sales of $787,000 with a sales discount of $17,000.

From there, Total sales = 787,000 - 17,000 = 770,000, Starting Assets = 500,700, Ending Assets = 500,300.

Applying the formula, calculate the asset turnover ratio of company A: (770,000) / ((500,700 + 500,300) / 2) = 1.54. This shows that, with 1 USD invested in total assets, company A generates 1.54 USD in revenue.

3. How to evaluate asset turnover ratio

So, how can businesses evaluate asset turnover ratio effectively and accurately? Normally, the asset turnover ratio depends on the ability of the business to generate revenue in that year from which to evaluate business performance. Therefore, calculating the asset turnover ratio is very important and necessary.

However, calculating the asset turnover ratio the traditional way, manually, can lead to small data recording errors. This can make the asset turnover ratio results inaccurate.

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In particular, 1C:Company Management supports Asset Turnover Ratio management to help evaluate asset turnover ratios to optimize asset use to generate revenue. Thereby helping businesses save time, effort and increase efficiency in warehouse management.

4. 3 indicators to evaluate business performance

To have a clear view of the financial performance and identify problems that need to be overcome during operations, businesses need to evaluate operational performance, goods and cash flow to determine the turnover ratio. Rotate total assets most accurately. Performance assessment indicators can be expressed through:

4.1 Inventory turnover

Managing the inventory turnover system helps businesses have easy control. The inventory turnover ratio shows the average inventory turnover during a business period calculated using the formula:

Inventory turnover ratio = Sales / Average inventory

A high inventory turnover index shows that the business sells effectively and does not have too much inventory. This helps minimize risks in inventory management. However, if this index is too high, businesses may have difficulty meeting customer requests promptly when they need goods.

4.2 Receivables turnover

To reflect the debt management status of an enterprise and the ability to recover capital during business periods, we can use the accounts receivable turnover index. This index is calculated using the formula:

Accounts receivable turnover = Net sales / Average accounts receivable

A high receivables turnover ratio indicates good debt collection ability from customers, partners and suppliers. This shows that the business has a reliable, quality partner who can cooperate long-term. However, if this index is too low, it can cause misappropriation of capital, unrecovered debt, difficulties in working with partners and related problems. This may affect the business process.

4.3 Long-term asset turnover

Long-term asset turnover refers to the use of long-term assets in a business such as machinery, equipment, factories, etc. To know how many dollars of revenue each dollar invested in long-term assets will bring, we can use the long-term asset turnover index, calculated by the formula:

Long-term asset turnover = Net revenue / Average total long-term assets

Thus, the article on 1C Vietnam has provided an overview for businesses to better understand what Asset Turnover Ratio is and how to calculate asset turnover ratio. In addition, businesses can apply 1C:Company Management software with features to support effective warehouse management. If you have any questions, please contact 1C Vietnam immediately for quick answers.