ASSET TURNOVER RATIO
Let’s say that we are the owners of a Café, we would want our coffee machine to generate as much sales as possible right?
We would want every detail of our Café, from the paintings hanging on the wall to the exterior appearance to serve as our marketing tool to attract more attention and improve our sales right?
So, hopefully every dollar invested in our assets will be able to generate as much as as possible right??
In order to "judge" our performance, we can look at the ASSET TURNOVER RATIO, it measures how much sales are generated per dollar of asset.
Generally speaking, the higher the asset turnover ratio, the better the company is performing.
The asset turnover ratio tends to be higher for companies in certain sectors (high sales volume & low asset bases) than in others (large asset bases), and can vary widely from one industry to the next.
For example, Café Moon is able to generate RM120,000 revenue vs RM80,000 total assets, hence the asset turnover ratio = 1.5, which means that for every RM1.00 worth of assets, Café Sun is able to generate RM1.50 worth of sales.
Property Sun, a property developer which needs larger asset base (RM1.5mil) is only able to generate RM170,000 revenue, therefore, the asset turnover ratio is 0.113.
On the other hand, Ace IT Company, distributor of IT products, which require lower asset base (RM115,000), revenue RM630,000, asset turnover = 5.48.
Hence, comparisons are only meaningful when they are made for different companies within the same sector!
Good morning & happy investing!!
WY, Stockaholics
Growth • Through • Sharing
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