The asset turnover ratio calculates the total revenue for every dollar of assets a company owns. To calculate asset turnover, take the total revenue and divide it by the average assets for the period studied. (Note: you should know how to do this. In lesson 3 we took the average inventory and receivables for certain equations. The process is the same. Take the beginning assets and average them with the ending assets. If XYZ had $1 in assets in 2000 and $10 in assets in 2001, the average asset value for the period is $5 because $1+$10 divided by 2 = $5.) A quick exercise would benefit your understanding.
Asset Turnover = Total Revenue ÷ Average Assets for Period
In 2001 and 2000, Alcoa (Aluminum Company of America) had $28,355,000,000 and $31,691,000,000 in assets respectively, meaning there were average assets of $30,023,000,000 ($28.355 billion + $31.691 billion divided by 2 = $30.023 billion). In 2001, the company generated revenue of $22,859,000,000. When applied to the asset turnover formula, we find that Alcoa had a turn rate of .76138. That tells you that for every $1 in assets Alcoa owned during 2001, it sold $.76 worth of goods and services.
$22,859,000,000 revenue ÷ $30,023,000,000 average assets for period = .76138, or $0.76 for every $1 in revenue
General Rules for Calculating Asset Turnover
There are several general rules that should be kept in mind when calculating asset turnover. First, asset turnover is meant to measure a company's efficiency in using its assets. The higher the number, the better, although investors must be sure compare a business to its industry. It is fallacy to compare completely unrelated businesses. The higher a company's asset turnover, the lower its profit margin tends to be (and visa versa).
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This page is part of Investing Lesson 4 - How to Read an Income Statement. To go back to the beginning, see the Table of Contents.
| Alcoa 2001 Income Statement Excerpt | |||
| Period Ending | Dec 31, 2001 | Dec 31, 2000 | Dec 31, 1999 |
| Total Revenue | $22,859,000,000 | $23,090,000,000 | $16,447,000,000 |
| Cost of Revenue | $17,857,000,000,000 | $17,342,000,000 | $12,536,000,000 |
| Gross Profit | $5,002,000,000 | $5,748,000,000 | $3,911,000,000 |
| Alcoa 2001 Balance Sheet Excerpt | |||
| Period Ending | Dec 31, 2001 | Dec 31, 2000 | Dec 31, 1999 |
| Long Term Assets | |||
| Long Term Investments | $1,428,000,000 | $1,072,000,000 | $673,000,000 |
| Property, Plant and Equipment | $11,982,000,000 | $14,323,000,000 | $9,133,000,000 |
| Goodwill | $9,133,000,000 | $6,003,000,000 | $1,328,000,000 |
| Intangible Assets | $674,000,000 | $821,000,000 | $117,000,000 |
| Accumulated Amortization | N/A | N/A | N/A |
| Other Assets | N/A | N/A | N/A |
| Deferred Long Term Asset Charges | $1,746,000,000 | $1,894,000,000 | $1,015,000,000 |
| Total Assets | $28,355,000,000 | $31,691,000,000 | $17,066,000,000 |
