Asset to Sales Ratio - Meaning, Formula, Calculations, Interpretation, Examples
Hello everyone hi welcome to the channel of WallStreetmojo watch the video till the end also if you are new to this channel then you can subscribe us by clicking the bell ican friends today we going to learn concept.
That is asset to sales ratio formula and will understand with the help of an example over here but first we are looking we have a formula over your assets to the sales ratio so absolutely the asset has to come up the total assets divided by your total sales but what exactly this ratio is all about so we'll learn that the asset to sales ratio formula indicates.
That how much your assets a company possesses in regards to your you can say it revenue it earns using its assets so the formula for the asset to sales ratio we just saw that asset to sales ratio will go something like this is your total assets divided by sales right so the asset to the sales ratio formula example will take so that you will have some idea regarding this particular concept now let's say there's a guy called John John wants to look at the RMB company it wants look at the RMB company and its assets to sales ratio so john finds out that at the end of the year the rmb company has its total assets standing at $40,000 and john also discovers.
That last year that rmb come me has revenue which is standing at $1,00,000 what would be the assets to the sales ratio of rmb so we'll simply put the data into the formula the asset to the sales the asset to the sales formula goes something like this is your total assets divided by your sales amount so or you can say or the asset to the sales ratio will be your total assets divided by revenue that's your sales so the ratio goes as there should be 4,00,000 so 4x so if you get to know the average assets.
To the sales ratio of this similar company under the same industry will be easily be able to figure out whether for over here as you can see is a good asset to sales ratio or not so basically it's called the comparable company you can say comparable parish in that you are doing basically which will help you to determine where exactly the original company is standing against the industry now the important part what we learn up till now is the formula we learned how to calculate with the help of numbers the next sort of thing which we have in our list is explanation part without this any ratio analysis is useless the asset.
To the sales ratio formula is completely opposite of the asset turnover ratio now in this ratio we compare the assets with the revenues of the company that generates like for example if a company has 1,00,000 in assets and its revenue in the current year let's say I'm talking about the revenue in the current here is let's say 50,000 then the assets to sales ratio would be 100000/50000 which is 2 right so to find out the assets.
You need to first what where do you exactly need to go for finding the assets.
You need to go to the balance sheet of the company and sometimes we need to consider both the beginning assets as well as the ending assets so if it is the average assets we need to do the average of this - sometimes you need to consider both of this any of this one depends in that case the answer to sales formula would would change to the the formula will go rather than the total assets it will change to average total assets this is the change that will come in the formula now for sales you need to look.
At the income statement income statement right you need to remember that sales over here it means your revenue and it has nothing to do with the profit of the year so look straight up in the income statement right now what exactly is the use of this particular ratio now see assets to sales ratio isn't isn't a common ratio actually and it's not very widely used it's not at all widely used however this ratio can tell a lot of thing about the company.
How exactly it is operating now let's say that you have an investor who is monitoring your assets to sales ratio of the company for let's say last 2-3 years and you saw that the company had an asset to sales ratio standing at 5 in the previous year this is the previous year data and in the current year the see why the ratio stands at six so how would you interpret it this can be possible with with two possibility this can be they can be passively two possible reasons the first reason behind the increase assets to sales ratio is the lack of proper utilization of the company's assets.
All right for you lack of companies or lack of proper utilization of the company's assets now if the revenue is not increasing over here or not increasing in the pace of the increasing of the assets then the assets of the company are you can say underutilized right the second reason the second reason can be due to the installation of the new machinery that can be the second reason right so the sales could not be increased so as a result you may see and you can see an increase in the asset to sales ratio right so as an investor you should always always always look at the asset.
To the sales ratio to ensure that the assets are you can say the asset should be properly utilized and - in short I mean and to make sure that the revenue of the company has been increasing the revenue of the company are increasing at a decent rate so otherwise how would you ensure that you would be able to earn a decent return on the investments now this is your asset to sales ratio calculator you can go and find you can check this out the total assets over here will be will be punching on some numbers so as to get some really good interpretations out of the same the total assets is let's say 1 million and your total sales is standing at let's say or rather than.
I'll just make this 2 million and I'll make the sales as 1 million so what's going to happen the asset to sales ratio is 2 times so we can say that because the total assets it doesn't change that frequently as the sales sales is a quite of variable thing so keeping your total assets as you can see same if your revenue or the sales increases then let's see what exactly happens to the ratio if you if we increase this to 2 then your asset to sales ratio will go down that is it will reduce and keeping this as same if we decrease this amount or if if it decreases then the ratio will go up so try and make your own numbers try punching.
In the numbers and come up with some really good conclusions out of the same so that's it for this particular topic if you have learned and enjoyed watching this video please like and comment on this video and subscribe to our channel for the latest updates thank you everyone Cheers...
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