Asset turnover ratio
The asset turnover ratio measures a company’s efficiency in generating revenue from its assets. BDC divides net sales by total assets; Statistics Canada divides total revenue by total assets. BDC’s article says a ratio is meaningful only when comparing companies in the same industry.
A buyer or lender reading a set of statements may want to know whether the assets are working hard. BDC and Statistics Canada both describe asset turnover as a measure of how efficiently a business uses its assets to generate revenue.
How it is defined
BDC says the ratio is net sales divided by total assets. Statistics Canada’s methodology states it as total revenue divided by total assets and notes it is generally applicable to non-financial industries. The numerators differ, so check which one a report used before comparing two figures.
What it does not show
In BDC’s article, an HEC Montréal professor says the ratio varies a lot between industries, so there is no “good” ratio unless you compare two companies in the same industry. He also warns that old, depreciated equipment can make the ratio look favourable until the equipment needs replacing.
- Ask which revenue figure and which asset figure were used.
- Ask how old the main equipment is and whether replacement is due.
- Compare only with businesses of the same type.
See what financial records to ask a seller for and inventory turnover.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaGovernmentUsing the asset turnover ratio to improve your business
- 02Statistics CanadaResearch dataMethodology used to create enterprise size and financial ratios
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