The total asset turnover is a means of determining the relationship between the total assets of a company and the net sales produced with those assets. Essentially, the point of a total asset turnover is to make sure that the company is realizing an equitable return on the investment made in the sales effort using company assets. Periodic calculation of the total asset turnover can help a company identify processes and procedures that can be refined and help to increase the return.
The formula for calculating a total asset turnover is relatively simple. The first step is to identify the net sales occurring during the period under consideration. Next, the value of the average total assets held during the same period is determined. The total of the net sales is divided by the average total assets, providing a simple snapshot of the level of actual return that resulted from the use of the assets.
Going through the exercise of determining the total asset turnover for a given period is useful in several ways. First, the calculation makes it easy to track growth in net revenue from one period to the next, based on net sales. Second, fluctuations in the calculations from one period to the next can provide the motivation to look at the production process more closely. This activity may yield ideas on how to make better use of available resources and allow the same level of goods to be produced and sold, and lower the drain on assets at the same time.
Lastly, a total asset turnover can also point the way to better utilize assets that are not directly involved in the production process. This can include such assets as marketing and sales resources, the utilization of distribution equipment and processes, and even something as simple as packaging of the product. In the end, the process of calculating the total asset turnover is simply generating the best in net sales while making the best use of company assets at every step from the acquisition of raw materials to the completion of the sale.
