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    Asset Turnover

    The total asset turnover ratio is calculated by dividing the firm’s total revenue from operations by the firm’s average total assets.

    That is, the total asset turnover ratio looks at how much revenue the firm is generating from day-to-day operations as a percentage of the value of the firm’s assets used for generating this revenue. We exclude other sources of revenue, such as a gain from the one time sale of an asset, because we are only interested in the earnings of the business that can be repeated. If a firm can generate more revenue using less assets on an ongoing basis, the more likely it is that the firm is using its assets efficiently to generate sales.

    This ratio varies between industries. Some firms may have high fixed assets, such as manufacturing firms, and show a low asset turnover. However, if these firms have low variables costs, they will be generating good earnings. On the other hand, some firms such as retail firms will have few fixed assets and little overhead. These firms may have a high asset turnover ratio. However, if variable expenses are high, these firms may not show the same amount of earnings.

    We must also be careful in using the total asset turnover ratio when we look at firms with older assets. Because the book value of assets depreciates, firm’s with older assets may have a higher asset turnover then similar firms with recently purchased assets. 

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