Asset Turnover Ratio (ATR)

Asset Turnover Ratio can be defined as the value of sales generated for every rupee invested in assets for a given financial year. It is used to measure a firm’s efficiency.

Formula of Asset Turnover Ratio

Asset Turnover Ratio = Total Sales / Average Investment in Assets

Total sales figure can be obtained from the income statement. This is the revenue generated from sales for a given financial year.

Average investments in assets can be obtained from the balance sheet. It is given by:

Average Investments = (Assets at the Beginning of the Period + Assets at the end of the Period)/2

Example Explaining Asset Turnover Ratio

Let us assume a company X. For FY 2010-11, it generated sales of 10 Millions. On the other hand, it had assets worth 1 at the beginning of the period. Towards the end of the period, its assets were  2 Millions.

From the given information, we can deduce Asset Turnover Ratio as follows:

Total sales = 10 Millions

Assets at the beginning of the period = 1 Million

Asset Turnover RatioAssets at the end of the period  =          2 Millions

Average Investment                   =          (1+2)/2

Average Investment                   =          1.5 Millions

Thus, Asset Turnover Ratio       =          10 Millions / 1.5 Millions

                                                        =          6.67 Times

Analysis and Interpretation of ATR

What this means is that, for every $ that the company invests in assets, it generates sales of 6.67. Higher is this figure, better is the management of the company. This is because ideally a company wants to maximize its returns for every investment it makes. If the investment made does not get translated to increase improvement in top-line, and thereby improvement in bottom-line, there is some problem with the decisions taken by management.

Consider two companies X and Y, one with Asset Turnover Ratio of 6.67 and another with Asset Turnover Ratio of 3 respectively. Based on these numbers only, company X has made better investment decisions as compared to company Y.

Advantages of Asset Turnover Ratio

One of the primitive ratios used to measure a company’s performance is the sales generated. Higher the sales better is the company. But this may not give a true picture. Company X may have sales of 10 Millions and Y may have sales of 20 Millions. X may have invested 1 Million on assets, and hence its ATR is 10. Y may have invested  5 Million. So, it’s ATR is 4. Thus, although Y has double the sales, it still may not be as efficient as X because it’s investment fetches 4 times sales, whereas X’s investment fetches 10 times sales. Thus, ATR may give you a better view as compared to the sales figure.

Generally, it is observed that companies with low-profit margins have higher Asset Turnover Ratio. This is because low-margin companies tend to focus more on volume rather than per unit profit. Hence, they use their investments more rigorously.

Disadvantages of Asset Turnover Ratio

ATR does not measure how well a company is earning profits. It only measures how well a company is generating sales. Higher sales may or may not get translated to increase in profits. This is where ATR differs from Return on Assets (ROE).


It is always advisable to compare ATRs of companies within the same sector. Also, ATR on its own may not be a holistic ratio. It must be used in combination with various other ratios to get a better picture of the functioning of a company.

Last updated on : November 7th, 2017
What’s your view on this? Share it in comments below.

Leave a Reply

How to Analyze and Improve Debtors Turnover …
  • Margin of Safety
  • Fixed Charge Coverage Ratio
    Fixed Charge Coverage Ratio
  • How to Analyze and Improve Asset Turnover Ratio?
    How to Analyze and Improve Asset Turnover …
  • Defensive Interval Ratio
    Defensive Interval Ratio
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    eps calculation formulaadvantages and disadvantages of income statementdefine tangible assetsdscr report formatdepreciation expense for tax purposeswhat is wacc and why is it importantasset coverage ratio formuladefine variable expenseslimitations of capmzero coupon bond in indialiquidity ratios formulafinancial leverage percentage formulaadvantages and disadvantages of couponscompute waccfinding epsformula for profit margin ratiofuture value formula exampleeoq advantagescapital rationing wikipediafactoring accounts receivable exampleowners equity in accountingdebenture accountingnopat definitionasset turnover calculationdisadvantages of hire purchaseredeeming preference sharesborrowed capitalhedging principle definitionwhat is the meaning of debit in accountingbeneficiary meaning in urduthe fundamental accounting equation isroce wacccorporate finance examples and explanationsdebit credit ledgergrowth margincalculate mirrmodigliani miller approachshareholder vs stockholderhedging approach in working capital managementnon cumulative preference sharecalculating asset turnover ratiodecreasing debt to equity ratiolc at sight meaningwhat does a negative irr meanstakeholder and shareholderdebits and credits in bankingbreak even point in sales revenue formulastandby letter of credit indiawhen do inventoriable costs become expensesdegree of operating leverage formulabusiness bank overdraftwhat is zero base budgetingwhat are debits and credits accountingfinancial npvgolden growth modelusance lc 90 daysthe definition of factoringdefinition rocereal nominal personal accounts ruleswhat does pbp meanexamples of asset accountsrisk analysis in capital budgeting pptirredeemable convertible unsecured loan stockspayout ratio definitionimportance of irrpowr stockformula of working capital turnover ratiolevarageslimitations of dividend discount modelmmm dividend historydays receivable ratio formulacalculating benefit cost ratiodps epsdefine prepaid insurancenon-cumulative dividendreceivables turnover ratio formulahire purchase creditor