What Is the Asset Turnover Ratio? (2024)

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 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 $2.51 in sales, while Target generated $1.98. Target's turnover could indicate that the retail company was experiencing sluggish sales or holdingobsolete inventory. Fixed assetssuch 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 ofDuPont analysis, a system that the DuPont Corporation began in the 1920s to evaluate performance across corporate divisions. The first step of DuPont analysis breaks downreturn on equity(ROE) into three components, including asset turnover, profit margin,andfinancial leverage.

$\begin{aligned} &\text{ROE} = \underbrace{ \left ( \frac{ \text{Net Income} }{ \text{Revenue} } \right ) }_\text{Profit Margin} \times \underbrace{ \left ( \frac{ \text{Revenue} }{ \text{AA} } \right ) }_\text{Asset Turnover} \times \underbrace{ \left ( \frac{ \text{AA} }{ \text{AE} } \right ) }_\text{Financial Leverage} \\ &\textbf{where:}\\ &\text{AA} = \text{Average assets} \\ &\text{AE} = \text{Average equity} \\ \end{aligned}$​ROE=ProfitMargin(RevenueNetIncome​)​​×AssetTurnover(AARevenue​)​​×FinancialLeverage(AEAA​)​​where:AA=AverageassetsAE=Averageequity​

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 or the working capital ratio 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 assetturnover ratio(FAT ratio) 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, namelyproperty, plant, and equipment(PP&E).

The fixed asset balance is a used net of accumulated depreciation. Depreciation 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.

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.