Definition:
Asset turnover is a financial ratio that measures how efficiently a company uses its assets to generate revenue. It indicates the number of dollars of sales generated for every dollar of assets.
Formula:
Asset turnover = Net sales / Average total assets
Why is asset turnover important?
- Efficiency: A high asset turnover ratio indicates that a company is efficiently using its assets to generate revenue.
- Profitability: A high asset turnover ratio can contribute to higher profitability, as the company is generating more sales from its assets.
- Financial analysis: Asset turnover is a key financial ratio that is used to assess a company’s overall financial health and efficiency.
However, it’s important to note that a high asset turnover ratio alone may not be sufficient to assess a company’s financial performance. Other factors, such as profitability and liquidity, should also be considered.
In essence, asset turnover is a financial ratio that measures how efficiently a company uses its assets to generate revenue, and it’s an important indicator of a company’s overall financial health.
