The Asset Turnover Ratio (ATR) measures how well a company generates sales using its total assets. It is similar to the Fixed Asset Turnover (FAT), which measures net sales over net fixed assets, except the ATR includes all assets on the company balance sheet.
The Asset Turnover Ratio (ATR) is calculated as follows:
Asset Turnover Ratio (ATR) = Net Sales / Average Total Assets
Net sales and average fixed assets are calculated as follows:
Net Sales = Gross Sales – Returns & Allowances
Average Total Assets = [(Beginning of Period Total Assets + End of Period Total Assets) / 2]
Example ATR Calculation
Company A wants to measure its Asset Turnover Ratio (ATR) for the 2023 fiscal year (January 1, 2023 to December 31, 2023). Company A’s relevant balance sheet and income statement figures are the following:
- Total gross sales are $800,000, and returns & allowances are $25,000.
- On December 31, 2022, total assets are $150,000
- On December 31, 2023, total assets are $190,000
Company A’s calculations are the following:
Net Sales = 800,000 – 25,000
Net Sales = 775,000
Total Assets = (150,000 + 190,000) / 2
Average Total Assets = 170,000
Asset Turnover Ratio = 775,000 / 170,000
Asset Turnover Ratio = 4.56
Company A’s Asset Turnover Ratio for 2023 is 4.56
Things to Remember
Generally, a higher ATR is better because it implies that a company generates more sales than its total assets. However, many companies operate in sectors where sales are not driven by assets on a company balance sheet. For example, a consulting business relies on human capital to generate revenue rather than fixed assets, so the ATR metric for a consulting business is not as significant as a company in the manufacturing sector.