More of this Feature • Introduction • Income Statement • Revenue / sales • Cost of Goods Sold • Gross profit • Gross margin • The first three lines • Operating Expenses • R&D Expense • SG&A Expense • Goodwill Charges • Extraordinary Events • Accounting for extraordinary events • Oper. income/margin • Interest income and expense • Interest coverage ratio • Depreciation expense • Accum. Depreciation • Straight-line Method • Accelerated and Sum of the Years' Digits Method • Dbl Declining Balance • Comparing Depr. Mths • EBITDA • Income taxes • Minority Interests - cost, equity, and consolidated methods • Unreported earnings • Continuing operations • Accounting changes • Preferred dividends • Net income applicable to common shares • Net profit margin • Basic vs. Diluted EPS • Hiding share dilution • Share repurchases • Return on Equity- ROE • Asset turnover • Return on Assets- ROA • Projecting earnings • Formulas & Calculations • Putting it together • Segment 2

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Lessons

From Other Guides • Inventory Turnover • Receivable Turnover

Elsewhere on the Web • Asset Turnover • Net Asset Turnover • Asset Turnover Definition • Asset Turnover Ratio

Calculating Asset Turnover
The asset turnover ratio calculates the total sales [revenue] for every dollar of assets a company owns. To calculate asset turnover, take the total revenue and divide it by the average assets for the period studied. [Note: you should know how to do this. In lesson 3 we took the average inventory and receivables for certain equations. The process is the same; take the beginning assets and average them with the ending assets. If XYZ had $1 in assets in 2000 and $10 in assets in 2001, the average asset value for the period is $5 because $1+$10 divided by 2 = $5]. A quick exercise would benefit your understanding.

Asset Turnover:

Total Revenue
---------(divided by) ---------
Average assets for period

In 2001 and 2000, Alcoa [Aluminum Company of America] had $28,355,000,000 and $31,691,000,000 in assets respectively, meaning there were average assets of $30,023,000,000 [$28.355 billion + $31.691 billion divided by 2 = $30.023 billion]. In 2001, the company generated revenue of $22,859,000,000. When applied to the asset turn formula, we find that Alcoa had a turn rate of .76138. That tells you that for every $1 in assets Alcoa owned during 2001, it sold $.76 worth of goods and services.

$22,859,000,000 revenue
---------(divided by) ---------
$30,023,000,000 average assets for period

There are several general rules that should be kept in mind when calculating asset turnover. First, asset turnover is meant to measure a company’s efficiency in using its assets. The higher the number, the better [although investors must be sure compare a business to its industry. It is fallacy to compare completely unrelated businesses.] The higher a company's asset turnover, the lower its profit margin tends to be [and visa versa].

Next page > Calculating Return on Assets - ROA> << back, 35, 36, 37, 38, 39, 40, Segment 2 >>