Lousy inventory management leading to slow-moving or obsolete stock at hand.īroadly, most analysts consider a ratio of above 1.0 to be good.Low collection resulting in doubtful debt allowances.The company is holding excess production capacities.If the business is experiencing lower ratios, this may indicate internal problems.Ī lower ratio can also result from one or more factors, some of which can be: Low-margin industries tend to have a higher Asset Turnover Ratio, which is indicative of their pricing strategy.
This shows that assets still retain their value, and no replacement is necessary. It also means the business is productive, and it generates little waste in its operations. Usually, we prefer a higher ratio, which indicates the company makes fair use of its asset base. In practice, capital-intensive industry sectors generally have a slower turnover of assets. Comparing metrics between particular industries is not appropriate due to their highly varying capital structures.įor example, retail businesses generally have a much lower asset base, as they have small production capacities, while machine manufacturing entities tend to have more assets. It is essential to stay within the same industry, as different ones may have completely different average ratios. We can look into these classes by employing the Fixed Assets Turnover Ratio and the Working Capital Turnover Ratio.Īs with most ratios, we use the Asset Turnover Ratio to benchmark the business against other companies within the same industry sector.
We can break down assets into fixed assets and working capital to prepare a more detailed analysis. If we identify significant fluctuations in the balance of assets near one end of the period, we can employ a weighted average calculation. If we are facing issues with data limitations, we can also use the ending balance. Net sales represent the company’s revenue after deducting returns, discounts, and allowances for uncollectible receivables.Īverage assets are the average between the opening and closing balances.