what the ratio means
typically the asset turnover ratio is calculated on an annual basis the higher the asset turnover ratio the better the company is performing since higher ratios imply that the company is generating more revenue per dollar of assets the asset turnover ratio tends to be higher for companies in certain sectors than others retail and consumer staples for example have relatively small asset bases but have high sales volume thus they have the highest average asset turnover ratio conversely firms in sectors such as utilities and real estate have large asset bases and low asset turnover the asset turnover ratio can vary widely from one industry to the next so comparing the ratios of different sectors like a retail company with a telecommunications company would not be productive comparisons are only meaningful when they are made for different companies within the same sector asset turnover examplesthe asset turnover ratio for walmart inc wmt target corporation tgt at t inc t and verizon communications inc vz for fy2023 is shown in the table below 1234at t and verizon have asset turnover ratios of less than one which is typical for firms in the telecommunications utilities sector these companies have large asset bases so it is expected that they slowly turn over their assets through sales it would not make sense to compare the asset turnover ratios for walmart and at t since they operate in different industries comparing the relative asset turnover ratios for at t with verizon may provide a better estimate of which company is using assets more efficiently in that sector from the table verizon turns over its assets at a faster rate than at t for every dollar in assets walmart generated 2 51 in sales while target generated 1 98 target s turnover could indicate that the retail company was experiencing sluggish sales or holding obsolete inventory fixed assets such as property or equipment could be sitting idle or not being utilized to their full capacity dupont analysisthe asset turnover ratio is a key component of dupont analysis a system that the dupont corporation began in the 1920s to evaluate performance across corporate divisions the first step of dupont analysis breaks down return on equity roe into three components including asset turnover profit margin and financial leverage roe net income revenue profit margin revenue aa asset turnover aa ae financial leverage where aa average assets ae average equity begin aligned text roe underbrace left frac text net income text revenue right text profit margin times underbrace left frac text revenue text aa right text asset turnover times underbrace left frac text aa text ae right text financial leverage textbf where text aa text average assets text ae text average equity end aligned roe profit margin revenuenet income asset turnover aarevenue financial leverage aeaa where aa average assetsae average equity sometimes investors and analysts are more interested in measuring how quickly a company turns its fixed assets or current assets into sales in these cases the analyst can use specific ratios such as the fixed asset turnover ratio or the working capital ratio to calculate the efficiency of these asset classes the working capital ratio measures how well a company uses its financing from working capital to generate sales or revenue asset turnover vs fixed asset turnoverthe asset turnover ratio considers the average total assets in the denominator while the fixed asset turnover ratio looks at only fixed assets the fixed asset turnover ratio fat ratio is used by analysts to measure operating performance this efficiency ratio compares net sales on the income statement to fixed assets on the balance sheet to measure a company s ability to generate net sales from its fixed asset investments namely property plant and equipment pp e the fixed asset balance is a used net of accumulated depreciation depreciation is the allocation of the cost of a fixed asset which is expensed each year throughout the asset s useful life typically a higher fixed asset turnover ratio indicates that a company has more effectively utilized its investment in fixed assets to generate revenue 