11/25/2023 0 Comments Total asset turnover ratio![]() ![]() That is, using the asset turnover ratio formula:Īsset turnover ratio = Net sales / Average Total Assets (VZ), we have the following details and calculations: (in $ million)īeginning Assets ( Assets at the start of the year that was carried over from 2019)Įnding Assets ( Assets at the end of the year for 2020)Īverage Total Assets Ĭalculation of asset turnover ratio for Walmart, Target, AT & T, and Verizon Calculating asset turnover ratio for Walmart, Target, AT & T, and Verizonįrom the 2020 financial statements ( income statement and statement of financial position) of Walmart Inc., Target Corporation, AT & T Inc. (WMT), Target Corporation (TGT), AT & T Inc. We will be using the financial statements of Walmart Inc. We will calculate the asset turnover ratio for four companies in the telecommunication-utilities and retail sectors for FY 2020 and compare them. In order to understand how to interpret asset turnover ratio, we will look at an example. ![]() However, this interpretation and conclusion still depend on the average asset turnover ratio of the industry to which the company belongs.Įxamples of how to interpret asset turnover ratio This is not considered good for the company because it indicates that the company’s total assets cannot produce enough revenue at the end of the accounting period (usually a year). If the asset turnover ratio of a company is less than 1, it is said to have a low ratio. Also, by changing depreciation methods for fixed assets, a similar effect occurs on the asset turnover ratio because this will change the accounting value of the firm’s assets. However, this affects the company in a way, because it then has fewer resources to generate sales in the future. Selling off assets will improve the asset turnover ratio of the company in the short term because revenue (which is the numerator of the ratio formula) increases as the company’s assets (which is the denominator of the ratio formula) decreases. Hence, companies can artificially inflate their asset turnover ratio by selling off assets. Selling off assets has the effect of artificially inflating the asset turnover ratio. Management can attempt to make a company’s efficiency seem better on paper than it actually is by selling off assets. Also, a high asset turnover ratio interpretation may not necessarily always mean efficiency. If a company belongs to the retail industry and has an asset turnover of 1.5, for example, it is interpreted that the company is not doing well. However, interpreting this value as being good will also depend on the average asset turnover ratio of the industry to which the company belongs.įor instance, in the retail industry, the businesses’ total assets are usually kept low and as a result, most businesses’ average ratio in the retail industry is usually over 2. This is a good ratio for the company because it indicates that the company can generate enough revenue for itself. If the asset turnover ratio of a company is greater than 1, it is considered a high ratio. A high asset turnover ratio indicates that the company is more efficient in generating revenue from its assets. It is generally preferable for the interpretation of asset turnover ratio to be a higher value. Hence, the industry-wide asset turnover ratio is usually low even though real estate transactions may result in high- profit margins. Other business sectors like real estate normally take long periods of time to convert inventory into revenue. Also, publicly-facing industries such as retail and restaurants tend to have a higher asset turnover ratio because they depend heavily on converting assets to inventory, and then converting inventory to revenue. Hence, it would not be proper to compare this ratio for businesses in different sectors.Īs the asset turnover ratio varies across business sectors, some industries tend to have a higher ratio while some tend to have a lower ratio. Therefore, for a comparative asset turnover ratio interpretation to be valid, only the ratios of companies that are in the same sector should be compared. However, it is important to note that the asset turnover ratio would vary throughout different business sectors due to the varying nature of different industries. ![]()
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