Asset turnover = Revenue ÷ Total Assets
Indicates the relationship between assets and revenue.
Things to remember
- Companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover - indicating pricing strategy.
- This ratio is more useful for growth companies to check if in fact they are growing revenue in proportion to sales.
For Cory's Tequila Co.: $12,154 ÷ $14,725 = 0.85
Asset Turnover Analysis:
This ratio is useful to determine the amount of sales that are generated from each dollar of assets. As noted above, companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover. Cory's Tequila Co.'s asset turnover seems to be relatively low, meaning that it makes a high profit margin on its products. For companies in the retail industry you would expect a very high turnover ratio - mainly because of cutthroat and competitive pricing.