Finance Formulas / August 5, 2018 / Briana Leonard
Average total assets is defined as the average amount of assets recorded on a company's balance sheet at the end of the current year and preceding year. This figure is most commonly used in comparison to the total sales figure for the current year, to determine the amount of assets required to support a certain amount of sales. This is a useful comparison, since a low asset level in comparison to sales implies that the management team is making highly efficient use of its assets in running the business.
Generally speaking, the higher the asset turnover ratio, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets. The asset turnover ratio tends to be higher for companies in certain sectors than in others. Retail and consumer staples, for example, have relatively small asset bases but have high sales volume and, thus, often yield the highest asset turnover ratio.
The debt to total assets ratio is calculated by dividing a corporation's total liabilities by its total assets. Let's assume that a corporation has $100 million in assets, $40 million in liabilities, and $60 million in stockholders' equity. Its debt to total assets ratio will be 0.4 ($40 million of liabilities divided by $100 million of assets), or 0.4 to 1. In this example, the debt to total assets ratio tells you that 40% of the corporation's assets are financed by the creditors or debt (and therefore 60% is financed by the owners). A higher percentage indicates more leverage and more risk.
Every business has assets, or things that the company owns and uses in its business in order to make money. These assets can include not just tangible items like cash, supplies, buildings, and equipment, but also intangible assets like trademarks and copyrights. The asset turnover ratio is a number that shows how much revenue is being earned for every dollar the company has spent on assets. It represents how well a company uses its assets to make money.
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