Thus this ratio can be incorrect based on the list of the actual asset used an asset which did not contribute at all. It includes idle asset too: The ratio includes the entire asset even those which were not deployed in the production or not considered in the specific period where the turnover was generated.The disadvantages of the ATR can be considered as the following: Success/Failure rate of asset: Managers can determine how effective or efficient their asset deployment has been for the company.It balances the revenue in sales along with the proportion of assets: This ratio is very useful for companies that are in the growth stage to check if the revenue generated is proportionate to the assets deployed.It takes into consideration all the assets: There are other ratios which is called fixed asset turnover ratio which only includes fixed asset but in the case of ATR we generally consider all the assets under operation i.e.
The advantages of ATR can be considered as the following: Thus on the basis of a formula, we can determine the follows: In terms of asset turnover ratio, it shows how much sales are made utilizing per dollar amount of the asset whereas in case of return on asset ratio it shows us how much per dollar we invest in the asset to generate the amount of the net earnings. The basic difference between asset turnover ratio and return on asset is that the where ATR is defined as the ratio between net sales to the total assets through which this sale was generated, on the other hand, return on asset is defined as the ratio between net income to the total assets through which this income was earned. Though it may not always be a case that a company with a low ATR will have some major issues as in some industries it is common to have a lower ratio. A higher number of this ratio is the one that a company or industry would desire because it represents an efficient and effective use of the assets in generating sales for the company. Industries that are driven with a lesser margin of profit are generally the ones where the ratio is very high whereas the companies which operate in a capital intensive industry tend to have a very low number of the same ratio. Investors too prefer companies with a high asset turnover ratio because this in one way proves that the company is deemed to be financially healthy and good in utilizing its assets. A lower ratio signifies that assets are underutilized and the business lacks efficiency and there might be some internal problems associated with the company. Interpretation of Asset Turnover RatioĪsser turnover ratio varies from industry to industry. Thus this means for every dollar which was employed in the total asset the company current has, the company generates $1.68 in sales.
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