# What Is the Asset Turnover Ratio? Calculation and Examples

> **Definition**
>
> The asset turnover ratio measures how efficiently a company is using its assets to generate revenue.

## What Is the Asset Turnover Ratio?

The asset turnover ratio measures a company's total revenue relative to the value of its assets. The asset turnover ratio indicates how efficiently the company is using its assets to generate revenue.

The higher the asset turnover ratio, the more efficient a company is. If a company has a low asset turnover ratio, it is not efficiently using its assets to create revenue.

### Key Takeaways

*   Asset turnover is the ratio of a company's total sales or revenue to its average assets.
*   The ratio helps investors understand how effectively a company is using its assets to generate sales.
*   This ratio can be used only for comparison to companies in the same sector, as a "good" or "bad" number varies widely among industries.

![Asset Turnover Ratio](https://www.investopedia.com/thmb/6X6KmVFgQRNdZf-3kIzgm8qwBe8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Assetturnover-6ea63bd69a8e4cb5a6bdf5fdfc56576a.jpg)

*A higher ratio indicates a company is using its assets effectively to generate sales and produce revenue. — Investopedia / Michela Buttignol*

## Calculating the Asset Turnover Ratio

The asset turnover ratio uses the value of a company's assets in the denominator of the formula. The average value of the assets for the year is determined using the value of the company's assets on the balance sheet as of the start of the year and at the end of the year.

The sum of the two values is divided by two. Total sales or revenue is found on the company's income statement and is the numerator.

$\begin{aligned} &\text{Asset Turnover} = \frac{ \text{Total Sales} }{ \frac { \text{Beginning Assets}\ +\ \text{Ending Assets} }{ 2 } } \\ &\textbf{where:}\\ &\text{Total Sales} = \text{Annual sales total} \\ &\text{Beginning Assets} = \text{Assets at start of year} \\ &\text{Ending Assets} = \text{Assets at end of year} \\ \end{aligned}$

## What the Ratio Can Tell You

Typically, the asset turnover ratio is calculated on an annual basis. The higher the asset turnover ratio, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets.

The asset turnover ratio tends to be higher for companies in certain sectors than others. Retail and consumer staples, for example, have relatively small asset bases but have high sales volume; thus, they have the highest average asset turnover ratio. Conversely, firms in sectors such as [utilities](https://www.investopedia.com/terms/u/utilities_sector.asp) and real estate have large asset bases and low asset turnover.

> **Fast Fact**
>
> The asset turnover ratio can vary widely from one industry to the next, so comparing the ratios of different sectors, like a retail company with a telecommunications company, would not be productive. Comparisons are only meaningful when they are made for different companies within the same sector.

## Examples of the Asset Turnover Ratio

The asset turnover ratio for Walmart Inc. ([WMT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=wmt)), Target Corporation ([TGT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=tgt)), AT&T Inc. ([T](https://www.investopedia.com/markets/quote?tvwidgetsymbol=t)), and Verizon Communications Inc. ([VZ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=vz)) for FY 2024 is shown in the table below.

AT&T and Verizon have asset turnover ratios of less than one, which is typical for firms in the telecommunications-utilities sector. These companies have large asset bases, so it is expected that they will slowly turn over their assets through sales.

It would not make sense to compare the asset turnover ratios for Walmart and AT&T, since they operate in different industries. Comparing the relative asset turnover ratios for AT&T with Verizon may provide a better estimate of which company is using assets more efficiently in that sector. From the table, Verizon turns over its assets at a faster rate than AT&T.

For every dollar in assets, Walmart generated $2.62 in sales, while Target generated $1.88. Target's turnover could indicate that the retail company was experiencing sluggish sales or holding obsolete inventory. Fixed assets such as property or equipment could be sitting idle or not being utilized to their full capacity.

## DuPont Analysis

The asset turnover ratio is a key component of [DuPont analysis](https://www.investopedia.com/terms/d/dupontanalysis.asp), a system that the DuPont Corporation began in the 1920s to evaluate performance across corporate divisions. The first step of [DuPont analysis breaks down](https://www.investopedia.com/ask/answers/041615/what-are-some-advantages-and-disadvantages-dupont-analysis.asp) return on equity (ROE) into three components, including asset turnover, profit margin, and financial leverage.

$\begin{aligned} &\text{ROE} = \underbrace{ \left ( \frac{ \text{Net Income} }{ \text{Revenue} } \right ) }_\text{Profit Margin} \times \underbrace{ \left ( \frac{ \text{Revenue} }{ \text{AA} } \right ) }_\text{Asset Turnover} \times \underbrace{ \left ( \frac{ \text{AA} }{ \text{AE} } \right ) }_\text{Financial Leverage} \\ &\textbf{where:}\\ &\text{AA} = \text{Average assets} \\ &\text{AE} = \text{Average equity} \\ \end{aligned}$

Sometimes, investors and analysts are more interested in measuring how quickly a company turns its fixed assets or current assets into sales.

In these cases, the analyst can use specific ratios, such as the [fixed-asset turnover ratio](https://www.investopedia.com/terms/f/fixed-asset-turnover.asp) or the [working capital ratio](https://www.investopedia.com/terms/w/workingcapitalturnover.asp), to calculate the efficiency of these asset classes. The working capital ratio measures how well a company uses its financing from working capital to generate sales or revenue.

## Asset Turnover vs. Fixed Asset Turnover

The asset turnover ratio considers the average _total_ assets in the denominator, while the fixed asset turnover ratio looks at only fixed assets.

The fixed asset turnover ratio ([FAT ratio](https://www.investopedia.com/terms/f/fixed-asset-turnover.asp)) is used by analysts to measure operating performance. This efficiency ratio compares net sales on the income statement to fixed assets on the balance sheet to measure a company's ability to generate net sales from its fixed-asset investments, namely property, plant, and equipment (PP&E).

The fixed asset balance is the used net of accumulated depreciation. [Depreciation](https://www.investopedia.com/terms/d/depreciation.asp) is the allocation of the cost of a fixed asset, which is expensed each year throughout the asset's useful life. Typically, a higher fixed asset turnover ratio indicates that a company has more effectively utilized its investment in fixed assets to generate revenue.

## What Is Asset Turnover Measuring?

The asset turnover ratio measures the efficiency of a company's assets in generating revenue or sales. It compares the dollar amount of sales to its total assets as an annualized percentage. Thus, to calculate the asset turnover ratio, divide net sales or revenue by the average total assets. One variation on this metric considers only a company's fixed assets (the FAT ratio) instead of total assets.

## What Are Some Limitations of the Asset Turnover Ratio?

While investors may use the asset turnover ratio to compare similar stocks, the metric does not provide all of the details that would be helpful for stock analysis. A company's asset turnover ratio in any single year may differ substantially from previous or subsequent years. Investors should review the trend in the asset turnover ratio over time to determine whether asset usage is improving or deteriorating.  

## What Is a Good Asset Turnover Value?

Asset turnover ratios vary across different industry sectors, so only the ratios of companies that are in the same sector should be compared. For example, retail or service sector companies have relatively small asset bases combined with high sales volume. This leads to a high average asset turnover ratio. Meanwhile, firms in sectors like utilities or manufacturing tend to have large asset bases, which translates to lower asset turnover.

## How Can a Company Improve Its Asset Turnover Ratio?

A company may attempt to raise a low asset turnover ratio by stocking its shelves with highly salable items, replenishing inventory only when necessary, and augmenting its hours of operation to increase customer foot traffic and spike sales.

[Just-in-time](https://www.investopedia.com/terms/j/jit.asp) (JIT) inventory management, for instance, is a system whereby a firm receives inputs as close as possible to when they are needed. So, if a car assembly plant needs to install airbags, it does not keep a stock of airbags on its shelves but receives them as those cars come onto the assembly line.

## The Bottom Line

The asset turnover ratio is a metric that compares revenues to assets. A high asset turnover ratio indicates a company that is exceptionally effective at extracting a high level of revenue from a relatively low number of assets. As with other business metrics, the asset turnover ratio is most effective when used to compare different companies in the same industry.

> **Article Sources**
>
> 1.  Walmart. "[Annual Report 2024](https://corporate.walmart.com/content/dam/corporate/documents/newsroom/2024/04/25/walmart-releases-2024-annual-report-and-proxy-statement/walmart-inc-2024-annual-report.pdf)," Pages 54-56.
>     
> 2.  Target. "[2024 Annual Report](https://corporate.target.com/getmedia/c23bca62-1790-47bd-ad0e-6971aee4f78d/2024-Annual-Report-Target-Corporation.pdf)," Pages 42-44.
>     
> 3.  AT&T. "[2024 Annual Report](https://investors.att.com/~/media/Files/A/ATT-IR-V2/financial-reports/annual-reports/2024/complete-annual-report-2024.pdf)," Pages 41-43.
>     
> 4.  Verizon. "[Form 10K for the Period Ended Dec. 31, 2024](https://www.verizon.com/about/sites/default/files/2024-Annual-Report-on-Form-10k.pdf)," Pages 54-56.