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Understanding Asset Turnover

by gbaf

Asset turnover (percentage asset turnover) is an economic ratio which measures the efficiency of an organization’s utilization of its resources to generate new sales. It’s a good measure of how effectively management is making use of the assets in its possession to promote new sales. Asset turnover rates often vary from quarter to quarter and are usually indicative of the difficulty of a given segment of the business’s operations. This article is going to be about two important topics that affect asset turnover: the customer and the corporation. The topics may seem obvious, but they deserve a look anyway.

The first topic we’re going to cover is the profit margin or the income statement ratio used by many accounting professionals to gauge asset turnover ratios. The profit margin is simply the annual income earned by the firm divided by its total assets. The lower the number, the better the profit performance. For example, if a firm has a net income of thirty million and has three hundred thousand accounts receivable, it would have a positive profit margin of twenty million. If this firm sold all of its products at a wholesale price of one dollar each, its profit would equal forty million dollars.

Now, let’s move on to the second topic I’m going to cover: the asset turnover formula or commonly referred to as the A/L ratio. The A/L ratio is actually a simple ratio utilizing the sales price of the inventory to the average total assets in inventory. If the ratio is high (or negative) it indicates the presence of excess inventory. The solution to this problem is simple: remove the low-performing merchandise from the equation. Now, the focus is going to change slightly. Instead of looking at the current value of the merchandise, we’re going to look at the potential value of the product under different scenarios.

When assessing the efficiency of your firm, it’s important to consider the sales situation for every line. Under most conditions, it’s obvious that sales will be higher at the top of the organization (the top executives and higher priced merchandise) than lower levels. Therefore, you’ll want to create the infrastructure to quickly and efficiently generate revenue from these high-end sales opportunities. This is where we’ll need to focus our attention on processes and structures that will allow you to efficiently generate revenue from these high-end opportunities.

One example of an asset turnover ratio, you may consider is the DuPont Analysis. The DuPont Analysis is concerned with the relationship between the cost per unit and the profit margin over time. To conduct the Dupont analysis, Dupont uses information about historical commodity and energy price data to determine a reasonable expectation for future commodity and energy prices.

Another aspect of DuPont analysis is related to overall revenue and profit margins. The company uses DuPont’s asset turnover ratio to determine its cost per unit, or CUV, and profit margin, which is referred to as the enterprise value. By comparing the CUV to the net selling price, you can calculate the value of each transaction. Once you have determined the value of each transaction, you can calculate the amount to be charged for maintenance over each quarter by considering the number of units sold during that quarter.

A third aspect of asset turnover involves the mix of fixed assets and variable assets. Many companies that generate high profits make up for this lack of flexibility by owning a large amount of fixed assets, such as oil and gas leases. In addition, some companies use a small amount of fixed assets for many of their sales activities. In order to evaluate how well their fixed assets and variable assets mix will affect their bottom line, an investment company will often use the DuPont analysis. By considering historical fixed asset and fixed income sales revenue and profit, and net sale proceeds over time, the investment company can determine whether the mix of fixed assets and variable assets is consistent with the investment management’s expectations.

Lastly, asset turnover ratios will help an investor determine whether the company is experiencing financial or service problems. The most useful ratio for analyzing asset turnover is the gross profit to sales ratio, or GRTS. This ratio, which expresses the total revenue less total costs incurred, provides a sense of operating efficiency for companies. An index of GRTS, the weighted average time, orTYT, can be used to compare different companies, as each represents one of the index scores.


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