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What is Asset Turnover? How to calculate it with the right formula? Why is it important? If you're looking for answers to these questions, you've come to the right place. In this article, you will learn everything you need to know about it. Furthermore, you will have access to an excel template with an example calculation that you can use you calculate the asset turnover ratio for any company.
What is Asset Turnover?
Asset turnover is used by investors to determine the value of a business’s revenue relative to its assets. This ratio is typically used to measure how efficiently a company is using its assets to create revenue. A higher asset turnover ratio indicates a more efficient business that is generating more revenue for every dollar of assets. However, what is considered a high asset turnover ratio depends heavily on which sector you are examining. As a result, comparing companies in different sectors won’t be particularly meaningful unless the sectors have similar asset turnover. To see which sectors have the highest and lowest asset turnover ratios, scroll down to the Benchmarks By Sector section.
It’s important to remember that asset turnover can easily be artificially deflated or inflated through large purchases or sales of assets. Additionally, other factors such as seasonality can cause changes in a company’s asset turnover ratio throughout a year. With this in mind, investors should analyze trends in a company’s asset turnover ratio over time in order to examine how asset usage changing.
Why is Asset Turnover important?
According to research carried out by James O'Shaughnessy, investing in companies with a too low Asset Turnover leads to underperforming the market.
Source: What works on wall street
By investing in shares in the lowest decile for Asset Turnover, you'd get a lower return you'd get by investing in the whole market. For this reason, it is extremely important that you check in what decile are your stocks. You don't want to underperform the market, do you?
How can you check that? Simple! All you have to do is use the Finbox data explorer. Just follow these simple steps:
Sign Up for free at Finbox
Go to the Finbox data explorer
Select the company and the metric you want to check (In this case we want to check the Asset Turnover)
Scroll down to Sector Benchmark Analysis
Control in what decile are your stocks (If your company is in the lowest decile, you will likely underperform the market. As you can guess, Apple is not at risk.)
The same research carried out for asset turnover was carried out for other balance sheet ratios. You can find a list of 10 balance sheet ratios with details on how they affect your stock returns in this guide.
How to calculate Asset Turnover with the right formula
Asset Turnover = Revenue/Average Total Assets
The asset turnover ratio is calculated by dividing a company’s revenue by its average total assets over the same period. Since revenue is generated over the course of a year, total assets are averaged between the start and end of the year.
Asset Turnover: Benchmarks by Sector
As of April 30, 2020, the sectors with the highest asset turnover ratios are consumer staples, consumer discretionary, and industrials. Financials, Utilities, and Energy are the sectors with the lowest asset turnover ratios.
You can get up to date stats and graphs like that directly in Excel with the Finbox Excel Add-in.
Asset Turnover Example [+Excel Template]
I’ve created an example calculation of the asset turnover ratio to try out. You can use it to calculate the asset turnover ratio for any company. Click here to open the spreadsheet in Google Sheets.
Don't underperform the market!
Finbox makes it easy to find companies with high asset turnover ratios. View the top 100 stocks with the highest asset turnover ratios here.