5.4.1 Asset utilisation ratio

This ratio is also called the asset turnover ratio or the capital turnover ratio. It assists in evaluating how well the assets in the business are being used to produce revenues. The higher the revenue, the more effectively the assets are being used. The asset utilisation ratio can be calculated by investigating the relationship between either some assets (for example, current assets, non-current assets, net assets), capital employed or total assets of a company. On a similar note, these assets can be related to sales revenue, gross profit or operating profit. For the purposes of analysis in this course, the following formula will be used for calculating the overall asset utilisation ratio:

The asset utilisation ratio is not a percentage. The resultant answer is expressed as the number of times in a financial year the sales can be divided by the capital employed in the business.

As you learnt earlier, capital employed in the business is used to buy assets to generate sales to produce the best possible operating profit. For convenience in this module, it is assumed for any ratio calculation that capital employed equals total shareholders’ funds + debt. It is important to understand that assets, especially current assets, can also be funded by current liabilities, such as a bank overdraft, and not just by long-term capital and, therefore, current as well as non-current debt is included in the calculation of this ratio.

Below is the calculation of asset turnover ratio for Remote Sensors Plc.

Although this ratio can best be interpreted by looking at the performance of other competitors and industry averages, it can be noticed that there was a slight decline in the ratio from 2024 to 2025. The reasons for this decline need to be investigated further. For example, a company might have made more investments in assets which will take some time before they start paying off. It is also possible that the company is not able to sell its inventory of finished goods. It is also important to note that a decrease or increase in sales volume may or may not persist in future years. Therefore, in order to interpret this ratio fully, we also need to make use of more information about the company’s future plans and projections.

In general, a higher ratio indicates the organisation is generating more revenue from the money invested in it and is therefore operating with greater efficiency. However, what represents a ‘good’ figure is very much sector dependent, as some processes inherently require high investment in production assets (think of a car plant or an aluminium smelter), while others may be labour intensive but ‘asset-light’ (a law firm could be such an example) and thus need less ‘capital employed’ to finance their assets. Just as ROS is an indicator of marketing effectiveness, but is influenced by the efficient control of costs, so too is the asset utilisation ratio mainly about efficiency but, because the ratio is based on revenue, it presumes that the marketing process is at least reasonable. If marketing is very poor, operations may produce the goods efficiently but with these ending up being reflected in inventory rather than sales.

It is also important to note that a decrease in asset utilisation may not always be a bad sign for the long-term financial health of a company. For example, if company management invests in non-current assets this year, the book value of company assets will increase and, although the new and more efficient assets might result in improved performance in the longer run, it will result in a deterioration in the asset utilisation ratio for the current year. Therefore, the companies that are expanding their business operations through investment in non-current assets might show a fall in their asset utilisation ratio.

Activity 14 provides you with an opportunity to develop numerical and financial analysis skills by calculating and interpreting asset utilisation ratios for a real company.