Asset-Turnover
Asset-turnover measures the firm’s capacity to generate revenue per unit of assets. The Asset-Turnover ratio is also one component of the ROE breakdown (DuPont Analysis), the other two components being the profit margin and the financial leverage. The higher the asset turnover ratio, the better the company is performing, since higher ratios indicate that the company is generating more revenue per dollar of assets. The total assets can be calculated by taking the average of assets held by a company at the beginning of the year and at the year’s end. The rate at which an asset is turned into revenue is industry specific, but generally the higher the asset turnover ratio, the better. Lower asset turnover may indicate poor production management, or excess of property or equipment. Managing asset efficiency is important because of its impact on the debt service ability of a company. The more revenue that can be generated utilizing the assets of the business, the more likely the business is to generate higher profits.
