Question

How is total asset turnover computed? Why would a financial statement user be interested in total asset turnover?

Answer 1

Asset Turnover Ratio = Net Sales/Total Assets

It measures the effciency of a company's assets to sales. Generally, higher ratio is preferred as there is an implication that company is efficient in generating sales. This ratio vary throughout different sectors, so companies in same sector should only be compared.

eg, XYZ Co had total revenue of $30 Billion at the end of fiscal year, and its total assets were $5 Billion at the end of fiscal year, So Asset Turnover Ratio = $30/$5 * 100 = 6

This ratio helps investors in understanding how effectively companies are using their assets to generate revenue. Investors compare companies in same sector or group using this ratio to determine which company is getting most out of its assets and also helps in identifying weaknesses.