Operating Asset Turnover Calculator

With this operating asset turnover calculator, you can easily calculate the operating asset turnover of a company. The operating asset turnover is a metric that will help you analyze a company's operational performance in generating revenue. Please feel free to check out our total asset turnover calculator and fixed asset turnover calculator to learn more about this topic.

This article will help you understand what operating asset turnover is and how to calculate the metric using the operating asset turnover formula. We will help you understand this concept by demonstrating some practical examples.

Operating asset turnover is an efficiency ratio that measures how efficiently a company can generate revenue using its operating assets. It is defined as sales divided by the operating assets.

Unlike the total asset turnover, this metric is particularly useful when a company holds a significant portion of assets that are not pertinent to its operation. This metric excludes those idle assets and focuses on assets the company uses for its day-to-day operations.

Now that you understand the definition of operating asset turnover, we can discuss how to calculate the operating asset turnover ratio.

To understand the operating asset turnover calculation, let's take Company Alpha with the following information as an example:

• Sales: $3,000,000
• Cash: $250,000
• Accounts receivable: $200,000
• Inventory: $400,000
• Prepaid expenses: $100,000
• Fixed assets: $1,000,000

The calculation requires three steps:

1. Calculate operating assets.

   Firstly, we need to calculate the operating assets using the formula below:

   operating assets = cash + accounts receivable + inventory + prepaid expenses + fixed assets

   Company Alpha's operating assets is $250,000 + $200,000 + $400,000 + $100,000 + $1,000,000 = $1,950,000.

2. Determine the sales.

   The sales are essentially the revenue of the company. The sales of Company Alpha is $3,000,000. To learn more about this topic, please check out our revenue calculator.

3. Calculate the operating asset turnover ratio.

   The last step is to calculate the operating asset turnover. We can do this by using the operating assets turnover formula below:

   operating asset turnover = sales / operating assets

   Hence, Company Alpha's operating asset turnover is $1,950,000 / $3,000,000 = 0.65×.

Now that we understand what operating asset turnover is, it's time to discuss how to interpret this metric.

As the operating asset turnover is defined as the sales over the operating assets, a higher ratio means that a company is more efficient in generating revenue. Hence, usually, the higher the ratio, the better.

However, beware that it can lead to a wrong interpretation if you compare this metric with companies in different industries. As each industry has different dynamics, this metric should only be compared to the industry average.

For instance, due to its high volume and low margin business model, the retail industry often has a high benchmark for operating assets turnover, typically ranging from 2 to 6. In contrast, utility companies might show a lower turnover ratio, often below 1, because of their significant investment in infrastructure and assets, which are essential for their operations but generate revenue over longer periods. Similarly, technology companies may exhibit varying turnover ratios, but generally, they tend to have moderate to high ratios due to their lower reliance on physical assets.

If a company's operating asset turnover is higher than the industry average, it is more efficient at generating revenue relative to its peers, thus might be a good investment.