Every business invests in several assets to earn income. These may include fixed assets which include immovable property and machinery or current assets which include inventory and other working capital requirements.
Asset Turnover Ratio determines how effectively a business is deploying its assets to generate revenue. In financial terms, Asset Turnover ratio is defined as the ratio of Net Revenue of the company to its Total assets (which comprises of both Fixed as well as Current assets).
Thus, Asset Turnover Ratio = Net Sales / Total Assets
For instance, if a company has an asset turnover ratio of 2, it indicates that it earns a revenue of 2 rupees for every rupee of assets deployed.
Significance for Business:
The business should aim at maintaining a higher Asset Turnover Ratio as it indicates better management of company’s assets. A lower Asset Turnover Ratio signifies that a major part of company’s assets are lying unutilized. The investors or lenders may see lower ratio as the indicator of slow revenue, huge amount of unsold inventory or poor collection practices.
However, the appropriateness of Asset Turnover Ratio depends upon the sector of your business since a sector employing more fixed assets generally experiences lower ratio than those involving lesser investment in assets such as service sector (e.g. Retail sector has the highest asset turnover ratio due to low asset base).
Loan Frame provides a solution by matching the loan requirements of your business to the best available options taking into account the sector you are working in and the potential of your business to generate more revenue from existing assets.