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Asset Turnover

Turnover analysis shows how quickly income-producing assets such as merchandise inventory comes in and goes back out the door. The quicker, the better! In normal circumstances, efficiently moving assets indicates a well-run business. Therefore, the asset turnover ratio measures how efficiently a company uses its assets to generate sales.

The basic formula for calculating asset turnover is net sales divided by average total assets. If net sales are $135,000 and average total assets are $87,500, asset turnover is 1.54 times. In other words, the company earns $1.54 for each $1 it invests in assets. That turnover ratio looks pretty good, but to truly give this ratio meaning, you have to compare it to asset turnover for similar companies