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Asset Turnover Ratio (Formula, Example) | Calculate Asset Turnover - YouTube
Channel: WallStreetMojo
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hello friends welcome to wall street
Mojo's Investment Banking tutorial
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today's topic is a very important topic
in ratio analysis that is the asset
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turnover ratios so as you can see in
this graph here this is the Walmarts
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asset turnover ratio this shows the
history of past 15-20 years of data and
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we know that asset turnover ratio
walmart has decreased over the past 20
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years and it is currently standing at
two point three nine two so what does
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this mean for Walmart and what is the
implication of asset turnover ratios
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decreasing over a period of time so in
this tutorial is all about learning what
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this is and how do you calculate that
and how do you interpret it so let us
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first look at what is asset turnover
ratio asset turnover ratio is nothing
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but sales divided by your average assets
so sales is the sales which the company
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does over a period of one year and the
average assets is is the assets which
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are at the start of the year the
beginning of the year and the end of the
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year and the average of these this two
so the sales is what you get from the
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income statement an income statement is
four for the particular year and the
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average assets is what you get from the
balance sheet so please note that you
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have to calculate average assets you
will not get this as a direct number the
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beginning and the ending divided by two
is what you will get as an average asset
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all right so let's now go back to a
Walmart example and calculate the asset
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turnover ratio of Walmart so what we
have here is Walmart has a total revenue
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of 482 billion dollars all right so
sales of Walmart is 482 billion dollars
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okay so I'm just writing with this as
482 the asset size for the beginning of
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the year is
2:03 billion beginning 2:03 and the
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ending assets is one ninety-nine point
six one ninety-nine point six so what
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are the average assets the average
assets will become this is equal to
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average of this these two the beginning
and the ending all right so what will be
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the asset turnover ratio of Walmart this
will be sales divided by your average
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assets so this comes out to be two point
three nine so that's what we have in
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terms of our result as well for Walmart
now there are two situations which can
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happen when we calculate this ratios
first one is when we calculate this
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ratio asset turnover ratio can be less
than one or asset turnover ratio can
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turn out to be greater than one so what
are the implications of the
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interpretation of such a situation when
asset turnover ratio is less than one
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what it means is that sales is less than
your average assets right so this means
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that you're you're not being able to
produce sales in proportion of your
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assets so say for example if this is 0.5
what will this mean is for every $1 of
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assets you are able to generate only 0.5
dollar of sales okay so this may or may
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not be a good situation to be in because
generally what happens is if it is less
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than 1 we should also look at its
industry peers so if the industry is
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such that the sales / I mean the average
asset that is the asset turnover ratio
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of the industry is generally low we
can't say that if it is less than 1 it
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is it is not good all right so please do
consider and compare this with the in
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industry average alright say second
situation again here is that asset
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turnover ratio is greater than one so
what this means the sales is greater
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than average assets so if the sales is
greater than average assets what we saw
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in the case of Walmart it was two point
three nine so what this means is every
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one dollar of assets of Walmart they're
generating two point three nine dollars
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of sales so that's incredible
but again is this good or bad you can't
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tell until unless you compare this again
with your industry average so industry
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average is a very critical thing and you
must remember that whether it is greater
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than 1 or less than 1 it doesn't by
default means that it's a good situation
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to be in
you must compare that with the industry
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average alright so let us now look at
asset turnover ratio example and see if
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there are two companies which operate in
the same sector can we identify which
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one of the two is actually a better one
from the asset turnover ratio point of
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view now in this example we are provided
with the gross sales and the sales
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discount okay for Company A as well as
Company P we also have assets at the
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beginning of the year as well as at the
end of the year ok so first thing first
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when we calculate the asset turnover
ratio ratio remember this the the
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numerator was sales and the denominator
was average assets right so please do
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note that when we talk about sales it's
always the net sales that we are talking
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about okay so it's never the gross sales
so please don't you know make a mistake
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of taking gross sales it's always the
net sales so if there are sales
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discounts or other kind of commissions
that have to be deducted please deduct
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those and then take the next sales Emma
so let's calculate the net sales first
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for this company anv the net sales for
company a will be 10,000 minus 500
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that's nine thousand five hundred and
for Company B it is eight thousand minus
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two hundred
so this
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your net sales and that's what is being
it should be used in the numerator all
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right
let's calculate the average assets the
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average assets is nothing but the
average of the beginning and the ending
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so this is 3,000 and 5,000 average that
will be 4,000 and likewise we calculate
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the average asset for Company B so this
asset turnover ratio this will be net
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sales divided by your average assets net
sales divided by average assets so
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obviously when we compare these two we
note that between a and B Company a is
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much better in terms of deriving sales
from its assets so company is deriving
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as much as to 0.375 dollars per unit of
asset on the other hand Company B is
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deriving only 1.56 so between these two
obviously Company A is much better so I
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hope you understood this basic example
now I would like to take another example
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which is of nestl茅's all right and we he
want to calculate the Nestle ISM average
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asset turnover which I will do it very
quickly so I've pulled this data from
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Nestle's Hanul reports and it provides
the data from 2010 until 2015 and we
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also have the asset side so for rub so
that we can calculate the average assets
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so let me quickly calculate the average
assets for this beginning and ending
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asset numbers which are provided here so
that we can calculate the asset turnover
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of Nestle and see what that number is
okay so the average asset for 2015 will
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be the ending and the beginning balance
right so if we are just considering 2015
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the start of the asset will be 134 point
nine six and the ending will be 125
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point four four so this is the average
asset and I can copy and paste this
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formula
until 2010 alright so we have this
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average assets
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thus asset turnover ratio is very easy
to calculate now this is sales divided
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by average assets so it comes out to be
0.7 zero nine for 2015 and looks like
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now Nestle has this average assets which
is in the range of 0.7 nine point eight
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so is this good is this bad that's
another question so that we should now
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compare this with the industry right
industry average or some of the other
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peers within the industry so that we can
take a call as to is it good or bad
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right so now that we have looked at the
calculation of Nestle's asset turnover
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ratio let's look at how the trend has
been over the past 15 years period we
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know that Nestle's asset turnover ratio
has been decreasing and it's currently
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standing at 0.7 zero nine okay so Nestle
is basically a part of the FMCG industry
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group and as we discussed earlier we
can't comment whether this is good or
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bad until unless we compare this with
the industry so I thought let's why not
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compare this with the Colgate and P&G
which are kind of not the true peers but
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still they are in the FMCG sector so on
one side we we intend in this graph you
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know you can find the asset turnover
ratio of Colgate and PNG so PNG is asset
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turnover ratio zero point five zero nine
however Colgate's asset turnover ratio
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is one point two six two so whereas
Nestle line Nestle lies somewhere here
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at the level of zero point seven zero so
if you look at the industry it's
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slightly doing better than PNG but it is
way below Colgate
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