Asset to Sales Ratio

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Asset to Sales Ratio

The asset to sales ratio is calculated by dividing total assets by sales revenues. The asset to sales formula can be used to compare how much in assets a company has relative to the amount of revenues the company can generate using their assets.

The numerator of the assets to sales formula, total assets, is averaged over the time period that is being evaluated and can be found on a company's balance statement. The denominator, sales revenues, is found on a company's income statement. It is important to remember that the asset to sales ratio does not look at a company's net income, or profit. It only looks at sales which may or may not relate to a company's actual profit.

Use of the Asset to Sales Ratio Formula

The asset to sales ratio is not widely used, however the concept of the asset to sales ratio is used often. The asset to sales ratio formula is the inverse of the asset turnover ratio. Whether one chooses to divide assets by sales or sales by assets, the concept is determining how well a company is utilizing its assets to generate sales.

As with other financial formulas, evaluating a particular company's asset to sales ratio across time or versus other companies requires more than the simple math. For example, suppose a company's asset to sales ratio increases for a given period of time compared to a prior period. This means that the company is not converting assets into sales as well. Perhaps there is an economic downturn and selling off assets is not necessarily the best consideration due to future sales expectations. Perhaps a company has recently heavily expanded and sales will not reflect this expansion until a future time. As all things can not be held constant, it is important to consider what exactly is not held constant.

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