Definition: The Total Assets Turnover Ratio shows how efficiently the total assets of the firm are employed to generate sales. This ratio gives an idea to the investor and the creditor about how the firm is managed, and the assets are utilized to generate revenues.
Ideally, the firm’s asset turnover ratio is compared with the other companies within the same industry because of the same business operations and the similar amount of investments made in the fixed assets.
The formula to compute this ratio is:
Total Assets Turnover Ratio= Net Sales/ Average Total Assets
The higher the ratio, the better is the utilization of total assets in the firm. This shows that a firm is able to generate revenues with the minimum amount of total assets without raising an additional capital.
Example: Suppose a firm has a net sales of Rs 50,000 and the opening and closing balance of the assets is Rs 1,00,000 and 50,000 respectively. The Total Assets Turnover Ratio will be:
Total Assets Turnover Ratio = 50,000/75000 = 0.67 times
Average Total Assets = (1,00,000+50,000)/2 =75,000