asset turnover
A ratio measuring how efficiently a company generates revenue from its assets, calculated by dividing revenue by average total assets.
Example
“Walmart's high asset turnover reflects its high-volume, low-margin retail model — massive revenue relative to asset base.”
Memory Tip
ASSET TURNOVER = revenue ÷ assets. High = squeezing a lot of revenue from few assets.
Why It Matters
Understanding asset turnover helps you evaluate whether companies you invest in or do business with use their resources effectively. A higher asset turnover ratio suggests a company generates more sales per dollar of assets, which can indicate better operational efficiency and potentially stronger investment returns over time.
Common Misconception
Many people assume that a higher asset turnover ratio is always better, but this overlooks industry differences and business models. Capital-intensive industries like manufacturing naturally have lower asset turnover than service-based businesses, so comparing ratios across different sectors can be misleading.
In Practice
If Company A has annual revenue of 5 million dollars and average total assets of 2 million dollars, its asset turnover ratio is 2.5, meaning it generates 2.50 in revenue for every dollar of assets. If Company B in the same industry has the same revenue but 3 million dollars in assets, its ratio is only 1.67, suggesting Company A uses its assets more efficiently to produce sales.
Etymology
ASSET (owned resources) TURNOVER (revenue generated per dollar). How much revenue each dollar of ASSETS TURNS OVER.
Common Misspellings
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Related Terms
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See Also
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