Net asset turnover measures how efficiently a company turns its assets into revenue. It is calculated by dividing total revenue by total assets. A high ratio indicates efficiency, while a low ratio suggests inefficiency. However, ratios should be compared among similar companies in the same industry.
Net asset turnover is a financial measurement that aims to assess how well a company turns its assets into revenue. It is usually calculated as a ratio of dividing a company’s total revenue over a given period of time by the total value of its assets during the same period. A company with a high equity turnover ratio is usually doing an efficient job turning its equity into revenue. Conversely, a low ratio could be a sign of inefficiency, although ratios are more effective when compared to companies in similar industries.
There are many ways to judge the financial health of companies in a specific market. Investors and entrepreneurs use these tools to judge companies’ strengths and areas where they may be lacking. Financial ratios take statistics obtained from income reports and balance sheets and create ratios that are useful for comparing similar companies to each other. One of the ways companies are judged on how well they are turning assets into sales is through their net asset turnover ratio.
In short, net asset revenue shows how assets translate into sales. A company with significant resources but mediocre sales totals may be failing somewhere in an area that needs to be addressed. Similarly, an extremely high turnover ratio could mean that a company is doing a poor job of investing its assets, which could lead to stagnation in the face of more aggressive competition.
To calculate the net asset turnover ratio you need to take a company’s sales totals from a period, which can be found in an income report, and divide that amount by the total assets held in that same period, a total which is displayed on a company’s balance sheet. For example, imagine Company A has $100,000 US Dollars (USD) in total assets in a given year and $80,000 USD in sales revenue in the same year. Dividing $80,000 USD by $100,000 USD gives a ratio of 0.8. That means the company has turned 80 percent of its assets into sales.
Whenever anyone uses a financial ratio such as one that measures net asset turnover, they should realize the limitations of the ratio. Companies from different industries need not be compared, simply because different industries require different amounts of assets to be held in order to run their businesses properly. Furthermore, younger companies are likely to have lower ratios simply because much of their excess assets will likely be related to investments.
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