What is asset turnover?

Definition

Asset turnover is how much revenue the business generates for each dollar of assets it holds. On the books, it is a reading of sales against the average asset total, not a ledger account you debit.

A two-location coffee company uses it to see whether machines, build-out, and stock are producing sales. A higher figure means each dollar of assets supported more revenue; a lower figure means a larger pile sat under the same sales.

It is a sales-to-assets reading, not a profit-to-assets reading. Two shops can turn assets at the same rate and still keep very different leftover profit.

Stay with revenue against the asset pile. What is left after expenses is a different page.

Where it shows up

P&L: Related to revenue.

Balance Sheet: Related to total assets.

Cash flow: Related to whether those assets are actually earning cash.

See also: Assets · Revenue · Return On Assets

When you look at the Balance Sheet, this reading starts from the total asset figure. You will not find a line labeled with this ratio.

The Income Statement supplies revenue for the period. Net income does not belong in the top number, because this page stays on sales, not leftover profit.

On the Statement of Cash Flows, the question is whether those assets are actually bringing cash in. Cash flow from operations can lag sales when the extra revenue is still sitting in unpaid tabs or unsold beans.

When the figure is high, the company is getting more sales out of the pile it holds. When it is low, a larger share of machines, build-out, or stock is sitting under the same sales.

How it works

Take revenue for the period. Divide by average assets.

Average assets is the beginning total plus the ending total, divided by two. A company that started the year at $360,000 and ended at $440,000 has an average of $400,000.

The result is how many dollars of sales each dollar of assets supported. 2.0 means each dollar of assets sat under two dollars of revenue.

Use the full asset total, not only fixed assets. Cash, accounts receivable, and inventory sit in the same pile as the espresso machines.

Stay with this sales-to-assets reading. Measuring leftover profit against the same pile is a different ratio.

The figure goes up when sales rise faster than the asset total, or when the company holds a leaner pile. It goes down when a second location, a remodel, or extra stock raises assets before sales catch up.

Current assets can move the ratio without a new cafe. A swollen receivable or bean inventory raises the denominator the same way a new machine does.

After the period closes, recompute with the new average and that period's revenue. Last year's 2.0 is history.

Match the period to the balances you average. A year of sales against one month-end total will swing with a single delivery or a single remodel invoice.

Example

Two Cup Coffee runs a downtown cafe and a second shop near the hospital. Revenue for the year was $800,000, and average assets were $400,000.

Divide $800,000 by $400,000. The result is 2.0.

Those two dollars of sales per dollar of assets mean the machines, build-out, stock, and cash together supported $800,000 of revenue. The company is not reading leftover profit here; it is reading how much sales the pile produced.

If the same year's revenue had sat against $800,000 of average assets, the figure would have been 1.0. The drinks sold would be the same; the pile would have been twice as large.

Opening the hospital shop with $200,000 of build-out and machines raises the average asset total before the new register is busy. Sales need time to catch the new denominator.

If next year revenue rises to $1,000,000 and average assets stay $400,000, the figure rises to 2.5. The same pile supported more sales without a change in how the leftover is measured.

The company does not post a line that says this ratio. The books already hold the revenue and the asset total; you divide.

Common mix-ups

Asset turnover is not return on assets. Return on assets puts leftover profit over the pile; this page puts revenue over the pile.

Asset turnover is not the asset total. The total is a dollar amount; this page is how much sales that amount supported.

Asset turnover is not a single-line turnover of stock or invoices. Those readings watch one account; this page watches the whole asset side.

Related terms

• Assets: Everything the business owns or controls that carries future economic value.
• Revenue: The total value of goods and services the business earned in a period.
• Return On Assets: Net income measured against total assets.
• Fixed Assets: Long-lived physical assets used to run the business rather than resold.
• Inventory Turnover: How many times inventory is sold and replaced in a period.
• Accounts Receivable Turnover: How many times receivables are collected and replaced in a period.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
• Working Capital: Current assets minus current liabilities, showing short-term operating cushion.