The majority of activity ratios measure the ability of the company to turn assets into earnings. All businesses utilize a simple principle, buy an asset at a low price and sell it at a higher price. Even service based businesses do this. Labor is purchased for a certain value and then sold for a much higher price. Retail businesses purchase inventory and then turn around, mark it up and then sell it to make a profit. There isn’t any business out there that doesn’t exercise this basic business principle.
Total Assets Turnover Rate
Total assets turnover rate reflects the ability of management to properly maximize value from existing assets. Its basic formula is net profit divided by total assets. A more sophisticated user will subtract out the net profit from total assets to establish the beginning of the year assets value and use that value as the denominator. In general there are many adjustments if a user really wants to rely on this particular business ratio. As with any ratio, utilize at least a dozen ratios of of the basic 22 ratios to determine or assess a company’s overall value.
Within the group of activity ratios, the total assets turnover rate is the broadest in scope. Similar to other activity ratios, it utilizes net sales as the numerator. However the denominator doesn’t focus in on a single balance sheet asset group like the working capital turnover or fixed assets turnover rates, it includes all assets.