Asset to sales ratio = Total assets ÷ Sales revenue
Asset to sales ratio tells about the capability of a company for using its assets to generate revenue. To calculate asset to sales ratio one can simply divide total assets by total sales revenue of company. But here keep it in mind that you have to use the average assets in numerator.
To take average one can simply add opening and closing balance for the period and then divide that by 2. The values are available at the balance sheet of the company. However on the other side the sales revenue can 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 company is entirely a different thing.
Asset turnover ratio is another measure which most financial analysts keen about while gauging the operations of a company. But both analysis ratios have their own usage details and benefits.
Asset to sales ratio vs. asset turnover ratio
Basically, assets to sales ratio is inverse of asset turnover ratio both concepts works to achieve the same task which is to measure the ability of a company to generate sales using its assets.
Although one must take in to account some external factors also when analyzing the profile of a company. For example, there may be an economic crunch at the time you are calculating ratios or may be sales are seasonal to inflate the figures for any specific period.
On the other side companies can also manipulate asset to sales ratio and asset turnover ratio also. For instance if a company sell its assets before closing the balance in assets accounts to cover up the decline in ratio. Likewise a number of factors can influence both asset to sales ratio and asset turnover ratio.
How asset to sales ratio is useful for investors
People are much familiar with the asset turnover ratio rather than asset to sales ratio. Asset to sales ratio is not widely known however, it revolves among finance circles including accountants, CFOs and others. The motive behind using asset to sales ratio is same as we discuss earlier.
It is recommended to evaluate the company over a long period of time to get a deeper view-ability for better decision making. If one is comparing a company to another, you must use benchmarks from same industry to make an unbiased analysis.
If the asset to sales ratio is increasing over time this indicates that the company is not utilizing its assets properly. However, you may also consider other factors where company may be expanded recently and sales do not reflect that expansion.