“Eventually, you will have a problem.”Ĭonversely, a ratio below the industry benchmark could be explained by an important investment you’ve recently made-such as buying new technology-that will increase your revenues in the near future. “Even though you haven’t done anything, the lower value of your assets improves your ratio-yet it’s not necessarily good for your business,” says Sponem. The value of some assets-for example, computers-will decrease over time (a process that accountants call amortization or depreciation, depending on the type of asset). But maybe not for long: If you have to replace all that equipment next year, the number will certainly drop. In that scenario, your assets aren’t costing much today, but your revenues might still be high-so your asset turnover ratio will seem favourable. Keep in mind that, like any financial indicator, the asset turnover ratio in isolation does not give you a complete picture.įor example, you might have old, depreciated assets (equipment) that will soon need replacing. What information isn’t included in the asset turnover ratio? “The evolution of the indicator over time can reveal whether or not you’re getting better at using your assets efficiently,” says Sponem, who suggests recording your ratio at regular (such as yearly) intervals. Think of it as a continuous effort to achieve a personal best. These finance professionals often have access to private datasets they can use to benchmark your business.Īnother meaningful comparison you can make-even without access to competitors’ ratios-is to look at your own ratio today versus other time periods. Sponem suggests asking your accountant or banker for comparisons. How do you find out what a competitor’s asset turnover ratio is? Having access to other businesses’ financial statements would allow you to calculate their ratios yourself, but that’s going to be tricky unless your competitors are public companies. This would involve finding out what a typical asset turnover ratio is for a business of your size in your industry.īenchmarking your business’s asset turnover ratio That’s perfectly normal, says Sponem.īecause of variables like high-cost machinery, you need to figure out how your business is performing relative to competitors. For example, a construction business requires far more significant assets-consider all the expensive machinery needed-than a service-oriented business, like an accounting firm.Īs a result, sales per asset, meaning the dollar figure of the sales divided by the dollar figure spent on the asset, will be lower in the construction business. However, acceptable ratios will vary across industries, and correspond to your business’s operating environment and size. A lower ratio can indicate inefficiency, which could be due to a poor use of assets, ineffective collection methods, weak inventory management or other issues. What is a good asset turnover ratio?Īs a general rule, a higher ratio is favourable because it indicates that the company is using its assets efficiently. In other words, every $1 in assets generated 50 cents in net sales revenue. Using the above formula, we can calculate the asset turnover ratio as follows: (Your net sales are your gross sales less any returns, discounts or allowances, while your total assets are equal to your equity minus any liabilities.)įor example, suppose your business made $750,000 in net sales last year and had total assets worth $1,500,000. Growth & Transition Capital financing solutions Kauffman Fellows Program Partial Scholarship Venture Capital Catalyst Initiative (VCCI) Industrial, Clean and Energy Technology (ICE) Venture Fund
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