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Asset Turnover Ratio Formula (Examples) | How to Calculate Asset Turnover? - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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clicking the bell ican Friend there we are
going to do our topic concept that is
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your asset turnover ratio formula this
is a part of the ratio analysis chapter
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now at the end of the day what we are
supposed to learn over here is one bit
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of portion or a slice of the ratio
analysis which is your asset turnover
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ratio formula which is basically because
it's a turnover ratio the sales has to
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come up it's the net sales because you
are considering the percentage of the
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total assets over here because it's the
assets ratio over here as such turnover
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ratio so net sales divided by the
average total assets now let's
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understand this formula now what is this
formula all about see your asset
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turnover ratio is basically your
efficiency ratio that judges how
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efficiently a company uses its assets to
generate I mean revenue so here the
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asset ratio formula will go something
like this your asset turn over your
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asset turnover ratio is equal to your
net sales divided by your average total
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assets so this is going to be your
formula now the asset turnover ratio
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formula example now let's take a
practical example of asset turnover
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ratio so as to get some more insight on
this now there is a company that's
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called ymc company which has gross
sales which has a gross sales ad
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standing at $75,000 and at the this is
at the end of 2017 I am talking about
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but the sales return that is I'm talking
about the SR the sales it and with
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the help of which you will you will
receive your net sales so this is just
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your crossings as you can see above
let's say your sales are done is $5,000
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and the total assets let's say the total
assets at the beginning of the
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is let's say 1,20,000 let's say
this is 2016 or 2017 itself let's at the
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beginning of the 2017 your reconsider is
as a calendar you and at the end of the
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the total assets let me just define this
this is total assets at beginning expand
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this and we'll say the next thing as a
total asset at the end so the total
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assets let's say at the end is let's say
$1,60,000 so based on this we need
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to find the asset turnover ratio of ymc
company first of all all we need to
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calculate is the net sales so I'll just
write the answer part what we need to
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find is the net sales for so one net
sale is going is going to be our gross
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sales less our sales it and so that's
going to be our net since remember you
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need to deduct any sales return
discount if any now we will calculate
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the average total assets by using the
simple average method now the total
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assets at the beginning of the year as
you can see is $1,20,000
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the average for the total assets at the
end is $1,60,000 so
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the average is going to be we need to
open the bracket 1,20,000 + 1,16,000
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we need to divide this thing by 2 so
we get an average of 1,40,000 so now we
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will put the data into the formula and
it's quite simple the asset turnover
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formula will go something like this
is equal to your net sales divided by
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your average total assets so how what
your net sales unit sales is 70,000
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divided by your average total assets as
1,40,000 so if we just divide
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70000 /1,40,000 you
get 0.5 so 0.5 is basically your answer
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if you compare the asset turnover ratio
of let's say ymc company with the asset
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turnover ratio of or the similar you can
see similar companies under the same
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industry but we would be
able to tell 0.5 is a really good number
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or exactly not now we will need to
understand the explanation part the
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explanation part of the asset turnover
ratio formula see the asset turnover
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ratio formula is completely you can see
opposite of the asset to sales the ratio
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remember this thing in this ratio we
look at the net sales and the average
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total assets so in the income statement
in the income statement you will find
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your gross sales you'll find what
crossings and will get based on this the
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net sales after getting the data of the
sales returns on the other hand if you
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want to find the total assets I am
talking about the total assets over here
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if you want to find the total assets
data then for the same we need to look
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at the assets that are at the beginning
of the you're right that's a foreign
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first would the beginning of the year and
the assets that are at the end of the
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year and and then we can take the
average of the assets at the beginning
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and at the end remember one thing in the
net sales case we need to read out
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anything that is related to sales
discount if any in the due course you
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also need to deduct
sales return from this from the gross in
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so has to receive your net sales now if
we want to go deep we can use the for
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this in this particular case we are
using over your simple average now if
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you want to go a little bit deeper in
this then we can absolutely go for the
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WAM the WAM method which is also known as your weighted average method okay now
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what exactly is the use over here what
is the use of the asset turnover ratio
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see unlike the assets to asset to the
sales ratio in case with you asset
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turnover ratio higher is good remember
one thing this ratio is better only if
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the ratio is higher now why this is a
big question
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why exactly see if the asset turnover
ratio if it is more it indicates that
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the asset of the company are you can say
they are been properly utilized by the
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company and that do you can see
efficiently and if this is less then you
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can say the assets are not properly
utilized and the assets are not being
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efficiently employed in the company
I'll give you example like for example
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if you find that the asset turnover
ratio of the company is let's say 0.6 so
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this means that the net sales are 60%
right of the average of the total assets
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now if your if your average total assets
ratio is let's say 1 then the net sales
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are can take as 100% of the
average total assets now when a company
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let's say buys a new machinery let's say
our company buys a new machinery then
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the company can produce more products
and sales out more products as well as a
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results the revenue of the company you
can see the revenue of the company
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increases along the way however you know if installing new Machneries don't
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results to increase in the sales that
means either the machineries are you can
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say defective either the machineries are
defective or the company isn't able to
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you can say utilize the assets properly
now this is your asset owner was a
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ratio calculator you can you can check
it you can check this out at the end of
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the day what we need to use this for is
to make your own interpretation by you
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know punching few numbers here and there by changing few details and you know you
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will see amazing results out of the same
let's say if you put your net sales as 1
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million and your average total assets as
2 million that means it's 0.5 X the more
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variable thing it is the net sales and
not the average total assets so let's
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change this to 2 million so absolutely
this will be at the increased price that
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is a 10x so as the net change is going
to increase as the net sales increases
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your ratio also increases but as your
net sales basically decreases your ratio
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also decreases
we are assuming that the total assets is
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remaining the same because they have
very little changeover even if they have
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can be handled so that's it for this
particular topic if you have learned and
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