Asset to Sales Ratio

An asset to sales ratio formula calculates total assets divided by total sales of a company; this ratio helps determine the efficiency of a company in managing its assets to generate enough sales for the company to make the assets worthwhile.

It indicates how much asset a company possesses regarding the revenue it earns using its assets. The formula is as follows –

Assets to Sales Ratio = Total Assets / Sales

This formula is the complete opposite of the asset turnover ratio formula.

In this ratio, we compare the assets with the company's revenue.

For example, if a company has $100,000 of assets and its revenue in the current year is $50,000; then the asset to sales would be = $100,000 / $50,000 = 2.

To find out the assets, you need to look into the company's balance sheet.

Sometimes, you need to consider both the beginning assets & ending assets and then average them to get the average total assets.

In that case, the Asset to sales formula then would change –

Assets to Sales Ratio = Average Total Assets / Sales

For sales, you need to look at the income statement.

It would be best if you remembered that "sales" means "revenue," and it has nothing to do with the year's profit. So look straight up in the income statement.

Let’s take a practical example to understand this formula.

John wants to look at RMB Company. John finds out that at the end of the year, RMB Company has total assets of $400,000. And John also discovers that RMB Company had revenues of $100,000. What would be the asset to the sales ratio of RMB Company?

We will put the data into the formula.

• Asset to Sales formula = Total Assets / Sales;
• Or, = $400,000 / $100,000 = 4.
• The ratio RMB Company is 4.
• If we get to know the average ratio of a similar company under the same industry, we will be able to figure out whether 4 is a good ratio or not.

An asset to Sales ratio isn’t a common ratio and is not widely used. However, this ratio can tell a lot about a company and its operations.

Let’s say that you, as an investor, have been monitoring this ratio of a company for the last 2-3 years. You saw that the company had a ratio of 5 in the previous year. This year, the ratio is 6. How would you interpret it?

There can be two possible reasons.

• The first reason behind the increased asset to sales ratio is the lack of proper utilization of company assets. If the revenue is not increasing (or not increasing at the pace of the increase of assets), then the company's assets are under-utilized.
• The second reason can be the installation of new machinery; the sales couldn’t be increased. As a result, you may see an increased asset to sales ratio.

As an investor, you should always look at this ratio to ensure that the assets are properly utilized, and the company's revenue has been increasing at a decent rate. Otherwise, how would you ensure that you would be able to earn a decent return from your investments?

Let us now do the same example above in Excel.

It is very simple. You need to provide the two inputs of Total Assets and Total Sales.

You can easily calculate the ratio in the template provided.