Do Asset to Sales Ratio Indicates Business Potential to Generate Revenue

Asset to sales ratio = Total assets ÷ Sales revenue

An asset to sales ratio tells about the capability of acompany for using its assets to generate revenue. To calculate asset to salesratio one can simply divide total assets by total sales revenue of the company.But here keep it in mind that you have to use the average assets in the numerator.

To take average one can simply add opening and closingbalance for the period and then divide that by 2. The values are available atthe balance sheet of the company. However, on the other side, the sales revenuecan be found from the income statement of the company.

Another thing to not confuse with that asset/sales ratio is not a profitability measure and do not consider the margin or net profit in calculations. Rather it only focuses on the sales revenue whereas the profitability of the company is entirely a different thing.

Asset to Sales Ratio

Asset turnover ratio is another measure which mostfinancial analysts keen about while gauging the operations of a company. Butboth analysis ratios have their own usage details and benefits.

Asset to sales ratio vs. Asset turnover ratio

Basically, assets to sales ratio are inverse of assetturnover ratio both concepts work to achieve the same task which is to measurethe ability of a company to generate sales using its assets.

Although one must take in to account some external factorsalso when analyzing the profile of a company. For example, there may be aneconomic crunch at the time you are calculating ratios or maybe sales areseasonal to inflate the figures for any specific period.

On the other side, companies can also manipulate asset tosales ratio and asset turnover ratio also. For instance, if a company sell itsassets before closing the balance in assets accounts to cover up the decline inratio. Likewise, a number of factors can influence both assets to sales ratioand asset turnover ratio.

How asset to sales ratio is useful for investors

People are much familiar with the asset turnover ratiorather than an asset to sales ratio. An asset to sales ratio is not widelyknown however, it revolves among finance circles including accountants, CFOsand others. The motive behind using the asset to sales ratio is the same as wediscussed earlier.

It is recommended to evaluate the company over a long periodof time to get a deeper view-ability for better decision making. If one iscomparing a company to another, you must use benchmarks from the same industryto make an unbiased analysis.

If the asset to sales ratio is increasing over time thisindicates that the company is not utilizing its assets properly. However, youmay also consider other factors where a company may be expanded recently andsales do not reflect that expansion.