The asset turnover ratio, representing net sales divided by average total assets, is a financial metric that measures a firm's efficiency in using its assets to generate sales or revenue.
The formula that represents net sales (or operating revenues) divided by average total assets is known as the asset turnover ratio. This financial metric measures a firm's efficiency in using its assets to generate sales or revenue. To calculate this, you would use the net sales figure obtained from the income statement and divide this by the average total assets, which is calculated by adding the beginning and ending total assets for a period and then dividing by two:
Asset Turnover Ratio = Net Sales / Average Total Assets
Here, net sales are the accounting profit, which is total revenues minus explicit costs, including depreciation. The average total assets are a part of the balance sheet and take into account both current and non-current assets owned by the firm. In terms of business decisions, a higher asset turnover ratio may suggest that the firm is managing its assets efficiently to produce sales.