How is the assets turnover ratio calculated?



Section 3. Activity Ratios

Q20. Assets turnover ratio
How is the assets turnover ratio calculated?

A20.
Assets turnover ratio
= Sales / Average total assets

[Entity 20-a]
Sales = $2,400,000
Beginning total assets = $1,900,000
Ending total assets = $2,100,000
Average total assets
= ($1,900,000 + $2,100,000) / 2
= $2,000,000
Assets turnover ratio
= $2,400,000 / $2,000,000 = 1.2

[Entity 20-b]
Sales = $5,320,000
Beginning total assets = $3,600,000
Ending total assets = $4,000,000
Average total assets
= ($3,600,000 + $4,000,000) / 2
= $3,800,000
Assets turnover ratio
= $5,320,000 / $3,800,000 = 1.4

[Note]
Higher assets turnover ratio –> more active.
Thus in this example, Entity 20-b is more active in assets turnover than Entity 20-a.