Asset Turnover is defined as .

Asset turnover is another efficiency measure. It addresses the question, “How hard are we working our assets to produce sales?” Since it mixes an income statement item, sales, with the balance sheet’s assets, it should be a better predictor of general health than any of the measures we have looked at so far. Unfortunately, it suffers from one important drawback—it pays no attention to profit.

If asset turnover stands alone, management pushes for sales growth faster than asset growth.

1) Sales must grow, but there is no incentive to make a profit. Much like market share, SG&A expenses, which increase demand, surge while prices fall. Management will stay in every segment with its starting product line.

However, management wants to minimize assets. It avoids plant improvements, downsizes excess capacity, and minimizes current assets. Management might add new products, but it will invest as little as possible in new plant and equipment.

Assets Reduced To Emphasise Asset Turnover