What is a good asset turnover ratio

The asset turnover ratio measures how effectively a company uses its assets to generate revenues or sales. The ratio compares the dollar amount of sales or revenues to the company's total assets to measure the efficiency of the company's operations.

To calculate the ratio, divide net sales or revenues by average total assets.

A higher ratio is generally favored as there is the implication that the company is more efficient in generating sales or revenues. A lower ratio illustrates that a company may not be using its assets as efficiently.

Asset turnover ratio example

Asset turnover ratios vary throughout different sectors, so only the ratios of companies that are in the same sector should be compared. The ratio is typically calculated on an annual basis, though any time period can be selected.