# What is Asset Turnover?

Asset turnover is a key metric used to describe your company’s financial health. Your asset turnover ratio measures how effectively your company is using the fixed assets and liquid assets that it has to generate revenue. Investors will use this ratio to compare your company’s performance to others in the same sector.

As a rule of thumb, the higher your asset turnover ratio, the more financially efficient your business.

Asset turnover is calculated as follows:

• start with the total asset value at the start of the year (beginning assets)
• find the total asset value for the end of the year (ending assets)
• add the total asset value at the start and end of year together and divide by two to get the value for the year’s average assets
• calculate total sales or revenue for the year
• divide total sales by the average value of your assets for the year

## Example of asset turnover

Now we know the definition of asset turnover, let’s take a look at an illustrative example.

Let’s say you run a boutique clothing store. This year you made \$270,000 in total revenue. Your total assets were worth \$20,000 at the start of the year and \$30,000 at the end. This gives us \$50,000 in total. Dividing \$270,000 by \$50,000 gives us a total asset turnover ratio of 5.4.

## Using the DuPont analysis for an asset turnover ratio formula

In the 1920s, the DuPont corporation developed a formula for breaking down its Return on Equity (ROE) across different divisions. The asset turnover ratio is a key component of this. However, it also factors in financial leverage and profit margins. As such, it can provide a clearer picture of how hard your assets are working for you than asset turnover alone.

This is worked out by multiplying asset turnover by profit margin and financial leverage. To calculate profit margin, net income is divided by revenue. Financial leverage is calculated by dividing average assets by average equity.

### What is fixed asset turnover?

Asset turnover is usually calculated using a company’s total assets. These include both fixed assets like property, machinery and plant, as well as current assets like inventory or cash, and liquid assets like accounts receivable, stocks and other marketable securities. Fixed asset turnover uses the same formula, but only takes fixed assets into account.

### What should my company’s asset ratio be?

That depends entirely on your industry. Some sectors are more capital intensive than others. The retail and service industries, for instance, tend to have relatively small asset bases but high sales volumes. Thus, they are likely to have higher asset turnover ratios than sectors like utilities or telecoms.

It’s important to have realistic expectations of your asset turnover ratio in comparison to other companies in the same industry.

### How can I improve my company’s asset turnover ratio?

The key to improving your total asset turnover ratio is improving total revenue while also spending less on assets. There are a number of ways in which you can work on this:

• replace inventory only when you have to
• embrace Just in Time inventory management
• use discounts and upselling techniques to liquidate slow-moving inventory
• offer in-store and curbside pickup to improve customer foot traffic and increase upselling potential
• audit software costs regularly to ensure that your SaaS provisions are cost efficient and fit-for-purpose
• augment opening hours to make your business more accessible to customers

### Appointments POS

The point-of-sale solution for bookings, payments, retail, inventory, and more.

### Ecommerce platform

Turn any business into an online business with a free eCommerce website.

### Invoicing software

Square Invoices are free to create and send. Easily send customised online invoices, estimates, and recurring payments with Square.

### EFTPOS machine

Square Terminal is your all-in-one credit card and eftpos machine for payments and receipts. It’s secure, reliable and an entirely fairer way to get paid.

### Point of Sale Software

Square Point of Sale makes it easy to sell in person, online, over the phone or out in the field. It’s simple to use, and there’s no training required

### Restaurant POS

An all-in-one restaurant POS system built to help owners, managers, and staff make the most of every shift.

### Retail POS

Square for Retail streamlines your business and keeps everything synced across in-store and online sales, inventory, purchase orders, Customer Directory, and advanced reports.

### Tap to Pay on Android™

Accept contactless payments on NFC-enabled devices. Download the Square POS app to start taking payments with just your phone.

NEW

## Take contactless payments with just your Android phone.

Accept contactless cards and digital wallets with Tap to Pay on Android.