The sales-to-asset ratio, also known as the asset turnover ratio, measures a company's efficiency in utilizing its assets to generate revenue. The basic formula for calculating this ratio is total sales divided by total assets.
Efficiency ratios like the sales-to-assets ratio allow companies to figure out how well they are using their resources to drive business activities. With this particular ratio, the goal is to create a high level of revenue relative to assets. An asset turnover ratio that meets or exceeds industry norms is ideal.
Ratio Calculation Example
Assume Company X generated $1 million in sales during a one-year period. At the start of that period, its total assets were valued at $225,000. At the end of the period, total assets equaled $275,000.
To determine the ratio for this particular one-year period, you first find the average value of total assets. In this case, the average of the starting and ending balances was $250,000. Then, divide $1 million by $250,000. The result is four. Therefore, the sales-to-assets or asset turnover ratio is four.
To calculate asset turnover in number of days, divided 365 by the ratio of 4. The result is 91.25 days. This ratio means the company generated sales equal to its average asset value every 91.25 days during the year.
While a high ratio is favorable, there is no exact target that represents a good or great asset turnover ratio, according to software provider ReadyRatios. Industry-specific factors like competition, market size, labor costs and capital investment needs all affect sales-to-assets. Thus, a ratio of three is efficient relative to the norm in one industry, but it may be low in another.
The asset turnover ratio generally is most important in product-based industries. Service companies normally don't maintain as much asset infrastructure, and therefore aren't as concerned with optimized efficiency in the use of facilities, equipment and tools to generate sales.
Using just one ratio data point can provide misleading results. Graphing your company's sales-to-asset turnover trend over time allows you to better gauge whether your efficiency is improving or declining.
Impact on Profit
A high sales-to-asset ratio is of little value if a company's isn't profitable. Companies may achieve a high level of sales, which makes sales-to-assets strong, but high operations costs limit profit. In some cases, a company may operate more profitably on lower sales volume. Strong profit is normally more desirable than a high asset turnover ratio if a company must choose.