Total asset turnover is one of the activity ratios indicating the relationship between assets and sales (revenue). Activity ratios help businesses to measure how efficiently various accounts are converted into sales or cash. Other activity ratios include average payment period, average collection period and inventory turnover analysis.
It calculates how efficiently assets are used to produce sales or revenue. In other words, how efficiently the balance sheet is managed. It shows how many dollars of revenue is earned per each dollar of assets. It is also referred to as asset turnover or asset turnover ratio.
The formula to calculate the ratio is as follows:
= Sales(Revenue)/Total assets
The health of this ratio is an important factor which contributes to a healthy return on investment (ROI/ROA).
Example of total asset turnover ratio analysis
Assume Heroic Company has sales of $750,000 and total assets of $880,000. The total asset turnover of Heroic Company is calculated as follows:
$750,000 /$880,000=0.85 or 0.9
This indicates that Heroic Company turns over its assets 0.85 (0.9) times per year.
Things to note about total asset turnover ratio
Usually the higher the asset turnover number the more efficiently assets of the business are utilized.
Further, to obtain a better understanding, one should compare the ratio of individual firms to industry averages, to that of leading firms in the industry and to historical results.