Asset Turnover Ratio

Asset turnover ratio is a financial metric that measures a company's ability to generate revenue from its assets. It indicates how efficiently a company is using its assets to generate sales.

The asset turnover ratio is calculated by dividing a company's total revenue by its total assets:

Asset Turnover Ratio = Total Revenue / Total Assets

A higher asset turnover ratio generally indicates that a company is generating more revenue per dollar of assets, which can be an indication of greater efficiency in using its resources. A lower asset turnover ratio may suggest that a company is not effectively utilizing its assets to generate sales, and may be an indication of operational inefficiencies or over-investment in non-performing assets.

Example:

Hilton's asset turnover ratio for the year 2021:

  • Total Revenue: $3.8 billion
  • Total Assets: $28.9 billion

To calculate the asset turnover ratio, you would divide the total revenue by the total assets:

Asset Turnover Ratio = Total Revenue / Total Assets

Asset Turnover Ratio = $3.8 billion / $28.9 billion

Asset Turnover Ratio = 0.13

In this example, Hilton has an asset turnover ratio of 0.13 for the year 2021. This means that for every dollar of assets the company has, it generates $0.13 in revenue. This is an indication that Hilton is not generating as much revenue from its assets as it potentially could be.