Financial Ratios Part 17 of 21: Asset Turnover Rate
How efficient is a business or farm using its capital?
Financial Ratios & indicators can assist in determining the health of a business. There are a minimum of 21 different ratios and indicators that can be looked at by many financial institutions. You cannot look at a single ratio and determine the overall health of a business or farming operation. Multiple ratios and indicators must be used along with other information to determine the total and overall health of a farming operation and business. This series of articles will look at 21 commonly used ratios and indicators.
Asset Turnover Rate is a measurement of Financial Efficiency and is determined based on information derived from a business’ or farm operations financial statements. The term Financial Efficiency refers to how effectively a business or farm is able to generate income. Looking at the Financial Efficiency of a business or farm assists the owner(s) in determining how the various aspects of the business such as production, financing, marketing, etc.… effects the gross income of the business.
The Asset Turnover Rate is measured as a percentage, the higher the percentage the stronger the business or farm. The Asset Turnover Rate essentially measures the efficiency of how a business’ or farms’ capital is being used. The ability to have high yields or production with lower input costs and or overall expenses can generate a higher Asset Turnover Rate. An Asset Turnover Rate of 45% - 50% or higher means the farm or business is on strong footing with a rate less than 30% - 35% means the business or farm needs to look at methods to decrease their expenses and increase its production and may be more susceptible to market fluctuation.
The following equations will determine your Asset Turnover Rate:
Asset Turnover Rate = Value of Production / Average Assets
Value of Production = Gross Cash Income + or – Inventory Change of Crops, Market Livestock, Breeding Livestock, & Other income items – Feeder Livestock Purchased – Purchased Feed
Average Assets = (Beginning Total Asset Values + Ending Total Asset Values) / 2
If you have any further question please feel free to contact your local Farm Management Educator or the author.
You can read the other articles in this series:
Part 1: The current ratio
Part 2: Working capital.
Part 3: Working capital to gross revenues
Part 4: Debt-to-asset ratio
Part 5: Equity-to-asset ratio
Part 6: Debt-to-equity ratio
Part 7: Net farm income
Part 8: Rate of return on assets
Part 9: Rate of return
Part 10: Operating profit margin
Part 11: The EBITDA measurement of profitability
Part 12: Operating profit margin
Part 13: Capital debt repayment margin
Part 14: Replacement margin
Part 15: Term debt coverage
Part 16: Replacement margin coverage ratio
Part 18: Operating-expense ratio
Part 19: Depreciation-expense ratio
Part 20: Interest-expense ratio
Part 21: Net income ratio