Asset to Sales Ratio

What is the Asset to Sales Ratio?

The Assets to Sales Ratio Formula is a similar calculation to the more popular Asset Turnover Ratio, as it also calculates how efficient a company is in employing its assets to generate sales. The main difference between these two ratios is that the Asset to Sales indicates how many dollars in assets are required to produce a dollar in sales.

Using the Asset to Sales or the Asset Turnover Ratio should lead analysts to similar conclusions, as the relationship between the variables is the same.

Nevertheless, some analysts prefer the Assets to Sales Ratio since it provides a clearer picture of how efficient an investment in the company is, as it calculates how much in assets are required to be invested to be produce a dollar in sales.

If the ratio is high, this indicates that the company requires much more assets and, therefore, the business may be classified as a capital intensive one.

In turn, if the Assets to Sales Ratio is low, this points to the fact that the business is highly efficient as it requires a lower investment to produce the same amount of sales. This ratio doesn’t really indicate if those sales are profitable, as it evaluates efficient and productivity rather than profitability.

Key Takeaways

Asset to Sales Ratio Formula

The formula to calculate the Assets to Sales Ratio is:

ATS = Total Assets / Net Revenues

Where:

Total Assets: The sum of all the company’s current, fixed, intangible and other assets.

Net Revenues: The total sales produced by the company during a certain time period minus any discounts, markdowns, returns or refunds extended to clients.

The information required to calculate the Assets to Sales Ratio can be found in the company’s financial statements, specifically in the Balance Sheet and the Income Statement.

Some analysts hand-pick the assets that they include in the calculation of the Assets to Sales Ratio, since some assets are not really productive in terms of generating sales. In order to really understand how efficient the business is they can exclude some assets that bring little to nothing in terms of generating additional revenues for the business.

The result of the formula is understood as the amount of assets required to produce a dollar of revenue.

Example

Let’s say an analyst wants to compare the efficiency of three different oil & gas distribution businesses who operate pipelines, refineries and storage facilities throughout the United States. Considering these 3 companies operate in the same industry, the results are relevant to understand their competitiveness and the productivity of their capital investments.

This is the information provided by each company:

(in thousands)

Company A

Net Revenues: $254,930

Total Assets: $674,300

Company B

Net Revenues: $388,198

Total Assets: $564,312 

Company C

Net Revenues: $783,799

Total Assets: $1,038,833

With this information we can calculate the ASR for each company as follows:

ASR_{Company A} = $674,300 / $254,930 = 2.65

ASR_{Company B} = $564,312 / $388,198 = 1.45

ASR_{Company C} = $1,038,833 / $783,799 = 1.33

According to this comparison, Company C seems to be much more efficient than the other two companies, as it only requires a $1.33 dollar in assets to produce $1 in revenues

How to Interpret the Assets to Sales Ratio? Key Analysis

Analyzing the Assets to Ratio Formula can provide very valuable information to investors who are looking for businesses that employ their capital profitably. A business that has a low ASR is one that employs its assets productively to generate more sales.

By using the example above we can explain some of the key insights that can be obtained through the analysis of the ASR. For example, Company C appears to be the most efficient business in the context of the ASR, closely followed by its competitor, Company B. The thing that could make these business more efficient and productive than Company A could be the fact that they use a higher percentage of their distribution and processing capacity, which in turn creates more revenue.

On the other hand, Company A seems to be 50% less productive than the other two and this could mean that their assets may have low utilization ratios, carrying and processing perhaps only a percentage of the volume they could effectively deal with.

This analysis may vary from one business to the other, but in any case the approach is the exact same. An analyst can use the Assets to Sales Ratio to determine if a company is productively using its assets to generate sales by comparing the company to its closest competitors.

Additionally, an analyst could also evaluate the evolution of the ASR over time. If there’s a downward trend in the ASR that could indicate that the company is struggling to produce sales with the assets it has. The solution for this would be to get rid of unproductive assets or find ways to increase the utilization rate, perhaps by exploring new markets.

On the other hand, if the ASR has been increasing over time this indicates that the company is increasing its efficiency and this could have a significant impact in its profitability if new investments are in the horizon. 

Cautions

Some analysts decide to hand-pick the assets they incorporate into their ASR analysis to make sure they evaluate the company based on the assets that are actually productive in terms of sales. Nevertheless, this can be a time-consuming and highly-technical task and it is not recommended for someone who is not an expert in the financial field.

If you do decide to engage in this practice, you must carefully analyze the notes attached to the company’s financial statements to find out which assets you should include and which you should leave out based on more detailed information that the one shown in the summarized Balance Sheet.

Some unproductive assets may include expenses paid upfront such as insurance policies, unproductive fixed assets such as corporate jets, and other of the sort. If you do decide to go this road, this could provide a clearer picture, as some companies may have significant portions of unproductive assets on their Balance Sheets.

Frequently Asked Questions

What does the asset to sales ratio indicate about a company’s operational efficiency?

The assets to sales ratio measures the amount of assets a company uses to generate one dollar of sales; a lower ratio suggests the company is using its assets more efficiently to produce revenue.

How can the asset to sales ratio be used to compare companies within the same industry?

This ratio allows for direct comparison of operational efficiency between companies by showing how effectively each company utilizes its assets to generate sales, making it easier to identify which companies are managing their assets more productively.

Can a change in the asset to sales ratio signal shifts in a company’s financial strategy?

Yes, a significant change in the ratio can indicate a change in the company’s operational or financial strategy, such as increased capital investments or changes in asset management practices, affecting its efficiency in generating sales.

Why might a company with a high assets to sales ratio be a cause for concern?

A high assets to sales ratio may signal that a company is not efficiently using its assets to generate sales, possibly due to underutilized assets or inefficiencies in operations, potentially impacting profitability.