What are the Asset Turnover Ratio and its parameters?

Evaluating any machine is the most important factor in business. Just like the employees of the organization provide value to the organization and give returns likewise for products, it is also very important for an organization to give a great output in future. So, to evaluate the machine, the best way is to find out the assets turnover ratio.

In this blog, we will have an overall discussion about the asset turnover ratio and its parameters.

Asset Turnover Ratio (AST)

Asset Turnover Ratio is the parameter that evaluates the machine’s work power and its duration. It works on the parameters of Revenue and assets of the company. So, the formula of AST would be revenue divided by assets.

Just like, a company uses their manpower and understands its performance. Likewise, the machine should be given greater revenue than the cost. If it fails, then it would be an underperforming asset.

Moreover, if your asset turnover ratio is between 1.5 times to 2 times, then your product is efficient. For example, in Infosys, their asset turnover ratio is more than 5 times. Their AST is not their building but their manpower.

So, always know whether your company is a Service Company or a production company. For example, if you open a confectionary plant, then the new equipment will decrease labour costs or production and even give a break-even time. This can only be done by evaluation of AST.

How to evaluate a new machine?

1. Comparing with existing machine

The new machine brings a great extent of increasing in the production of the product. The company should analyze its potential by comparing its size and extra production capacity.

2. Does a new machine save money?

The new machine should be evaluated on the basis of how much money it is saving for the organization. This should increase the revenue, save time and decrease the cost of the product. So, if the asset is performing as per the needs, then it becomes a liability for the company.

3. Using Asset Turnover Ratio

Analysing the quality of a product through its ratio shows the durability of the product. It can be done by using the asset turnover ratio formula.

Benefits of Evaluating Assets:

1. Technologically updated.

2. Asset Turnover Ratio

3. Fast Break-Even Points

4. Fast Production

5. Market value