Asset Turnover Ratio

Asset turnover is a key financial ratio that shows how effectively a company is able to convert its assets into revenue. This ratio provides a clear picture of how well the company utilizes the resources tied up in, for example, buildings, machinery, inventory, and accounts receivable.

The faster assets are turned over, the more efficient the use of capital—and the stronger the foundation for both liquidity and earnings.

What is the asset turnover ratio?

The asset turnover ratio measures the relationship between a company’s revenue and its total assets. It shows how many times the company’s assets are “turned over” during a fiscal period.

A high asset turnover ratio indicates that the company generates a relatively high amount of revenue in relation to the capital tied up in its assets. Conversely, a low asset turnover ratio may be a sign of operational inefficiency, excess capacity, or excessive capital tied up in assets.

How is the asset turnover ratio calculated?

To calculate the asset turnover ratio, you need to know two figures: the company's revenue and its total assets.

The formula is:

Asset Turnover Ratio = Revenue / Average Assets

Revenue is reported in the income statement, while assets are reported on the balance sheet. Average assets are typically calculated as (assets at the beginning of the period + assets at the end of the period) / 2.

Example:
Revenue: 1,000,000 DKK
Average assets: 2,000,000 DKK

Asset Turnover Ratio = 1,000,000 / 2,000,000 = 0.5

This means that the company turns over half of its assets in one year. The figure can also be expressed as 50%, but is most often used as a ratio.

Should the asset turnover ratio be high or low?

Generally speaking, a high asset turnover ratio is positive because it indicates that the company is able to generate revenue with relatively few assets. However, what is considered “high” or “low” depends largely on the industry.

Businesses such as retailers and grocery stores typically have a high asset turnover ratio because goods are bought and sold quickly. Capital-intensive industries such as manufacturing, real estate, and infrastructure often have a lower asset turnover ratio because large investments are tied up in fixed assets.

Therefore, this key figure should always be evaluated:

• compared to the industry average
• over several fiscal years
• along with other key figures

Relationship Between Return on Investment and Profit Margin

The asset turnover ratio is a direct component of the analysis of a company’s profitability and is closely linked to both the profit margin and the return on assets.

In simple terms, the rate of return can be described as:

Return on Assets = Profit Margin × Asset Turnover

This means that a company can improve its return on assets either by increasing its earnings per krone of revenue (profit margin) or by turning over its assets more quickly. Therefore, asset turnover is an important management tool in both operations and strategy.

Impact on Liquidity and Capital Tie-Up

A high asset turnover ratio means that capital is released from assets more quickly and can be used for operations, investments, or debt repayments. This strengthens liquidity and reduces the need for external financing.

A low turnover ratio, on the other hand, may indicate a high level of capital tied up—for example, in inventory or fixed assets—which can put pressure on liquidity—even in companies with solid revenue.

Asset Turnover and Qatchr

In Qatchr—Collectia’s platform for credit reports and financial data—the asset turnover ratio is not always displayed as a pre-calculated key figure. However, you have access to both revenue and balance sheet items, which allow you to calculate and analyze this key figure.

When asset turnover is considered alongside profit margin, equity ratio, and liquidity ratio, it provides a solid basis for assessing a company’s operational efficiency, capital utilization, and financial risk.