Calculate Asset Turnover Ratio

In the article “Calculate Profit Margin” and “Calculate Financial Leverage”, we showed how to calculate the profit margin from the company’s net income statement and its financial leverage from the balance sheet statement. In this article, we are going to discuss the asset turnover ratio, which is less heard from public. However, with the understanding of profit margin, financial leverage, and asset turnover ratio, we can breakdown return on equity (ROE) into these three elements and give us more insight in terms of the source of a company’s ROE. We are going to use net income and balance sheet statement from MSN Money website as an example to show you how to calculate asset turnover ratio
 

What is Asset Turnover Ratio

Asset turnover ratio is a ratio to measure business’s efficiency to generate revenue by using its asset. The higher the asset turnover ratio a company has, the more efficient a company is to generate revenue by its asset. The basic idea behind asset turnover ratio is that a company’s asset is a valuable resource. Generally a company increases its asset either from the contribution of shareholders or through the debt issuance. If a company can’t operate its asset efficiently, (e.g. generate revenue) investors might put their resources (money) to somewhere else to have better usage.
Asset Turnover Ratio = Revenue / Averaged total asset
Note we use averaged total asset during the fiscal period instead of total asset at the end of fiscal period because total asset fluctuates during the fiscal period while revenue is generated. It makes more sense to use averaged total asset to calculate the ratio
 

Calculate Asset Turnover Ratio from Net Income and Balance Sheet Statement

Because we need to know both a company’s revenue and averaged total asset in order to calculate asset turnover ratio, we need both the company’s net income and balance sheet statement in order to calculate asset turnover ratio. In the following example, we are going to use net income and balance sheet statement from company Caterpillar (CAT) to show how to calculate Caterpillar’s asset turnover ratio. You can access Caterpillar’s net income statement and balance sheet statement from MSN Money website or you can use or product, Stock Financial Statements Download, to download and export Caterpillar’s net income and balance sheet statement into .CSV format. Followings are screenshots of both downloaded net income and balance sheet statements
 

 

 

From its income statement, Caterpillar has total revenue $65875M in 2012. From its balance sheet statement, Caterpillar has averaged total asset ($81446M+$89356M)/2 = $85401M in 2012
=> Caterpillar’s asset turnover ratio in 2012 = 65875/85401 = 0.77
 

Commentary

So far we have showed you how to calculate a company’s asset turnover ratio based on its net income and balance sheet statement. Take Caterpillar for example, its asset turnover ratio is 0.77 in 2012. That means for every $1 dollar worth of asset, Caterpillar will generate $0.77 dollar revenue. However, just like profit margin, asset turnover ratio itself doesn’t give us a big picture in terms of how the company does overall. It is possible for a company to have high asset turnover ratio yet its ROE is low. In the next article, we are going to introduce DuPont formula and show you the relationship among ROE, profit margin, financial leverage, and asset turnover ratio.