What is Asset Turnover?
Asset turnover is a profitability ratio that describes a company’s efficiency at converting average total assets during a reporting period into sales.
How to Calculate Asset Turnover
Asset turnover is calculated by dividing net sales by average total assets.
Net sales is found on a company’s income statement.
Average total assets is calculated by averaging the total assets figure from the balance sheets of the current and the previous reporting periods. This is necessary because the income statement covers a reporting period, whereas the balance sheet represents a point in time.
How to Interpret Asset Turnover
A high inventory turnover suggests that a company is efficient at utilizing its assets to generate sales.
This is especially important for retailers such as Costco, who run on low net margins. Despite low margins, Costco is able to achieve high returns on equity (ROE) through high inventory turnover (see DuPont analysis).