What Is Net Asset Turnover?
Net asset turnover is a financial measurement which is intended to gauge how well a company turns its assets into revenue. It is generally calculated as a ratio by dividing a company's total sales revenue in a certain time period by the total value of its assets during that same period. A company with a high net asset turnover ratio is usually doing an efficient job of turning its capital into revenue. By contrast, a low ratio could be a sign of inefficiency, although the ratios are most effective when compared with companies in similar industries.
There are many ways to judge the financial health of companies in a specific market. Investors and business-owners use these tools to judge the strengths of companies as well as the areas where they may be lacking. Financial ratios take statistics gained from income reports and balance sheets and make ratios which are useful for comparing similar companies to each other. One of the ways in which companies are judged in terms of efficiency of turning assets into sales is through the net asset turnover ratio.
In short, net asset turnover shows how assets translate into sales. A company with significant assets but middling sales totals might be failing somewhere in an area that needs to be addressed. By the same token, an extremely high turnover ratio could mean that a company is doing a poor job of investing its assets, which could lead to stagnation in the face of more aggressive competition.
Calculating the net asset turnover ratio requires taking a company's sales totals from a period, which can be found on an income report, and dividing that amount by the total assets it held in that same period, a total which is displayed on a company's balance sheet. As an example, imagine that Company A has $100,000 US Dollars (USD) in total assets in a certain year and $80,000 USD in sales revenue in that same year. Dividing $80,000 USD by $100,000 USD yields a ratio of 0.8. This means the company turned 80 percent of its assets into sales.
Anytime that someone uses a financial ratio like the one that measures net asset turnover, he or she should realize the limitations of the ratio. Companies from different industries should not be compared, simply because different industries require different amounts of assets to be held to properly do business. In addition, younger companies are likely to have lower ratios simply because much of their excess assets will likely be tied up in investments.
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