Asset turnover measures a company’s productivity. The higher the asset turnover, the more productive the company. To calculate asset turnover, divide sales revenue by average assets:
Asset turnover = Sales revenue/Average assets
Suppose a company earned $100,000 in sales. Average assets during the same year equaled $50,000. To compute asset turnover, just divide sales by average assets:
Asset turnover = Sales revenue/Average assets
Asset turnover = $100,000/$50,000 = 2
To interpret this result, just say that for every $1 worth of assets the company owns, it earns $2 in revenue.
Many companies improve turnover by taking care to utilize their scarce assets very carefully. Here are a few ways to do that:
Use all assets continuously. Don’t let assets sit around doing nothing. Rather, keep your store’s shelves fully stocked with saleable merchandise. If you run a factory, make sure your machines manufacture products continuously.
Don’t buy inventory until you need it. Maintain just enough inventory in stock to keep your customers happy. Unnecessary inventory increases your assets and lowers your turnover.
Increase your sales without increasing assets. Expand your hours. Some big-box retailers stay open 24 hours to utilize assets around the clock.
Reduce your assets. Consider ways to cut assets without proportionately reducing sales. For example, the U.S. Postal Service closed many of its post offices and mailboxes in response to declining business. Even though this decision reduced the Postal Service’s asset base, it probably had a negligible effect on the service’s sales revenue.