What Is the Asset Turnover Ratio?

The asset turnover ratio measures the value of a company’s sales or revenues relative to the value of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue.

The higher the asset turnover ratio, the more efficient a company is at generating revenue from its assets. Conversely, if a company has a low asset turnover ratio, it indicates it is not efficiently using its assets to generate sales.

Formula and Calculation of the Asset Turnover Ratio

Below are the steps as well as the formula for calculating the asset turnover ratio.


$\begin{aligned} &\text{Asset Turnover} = \frac{ \text{Total Sales} }{ \frac { \text{Beginning Assets}\ +\ \text{Ending Assets} }{ 2 } } \\ &\textbf{where:}\\ &\text{Total Sales} = \text{Annual sales total} \\ &\text{Beginning Assets} = \text{Assets at start of year} \\ &\text{Ending Assets} = \text{Assets at end of year} \\ \end{aligned}$​Asset Turnover=2Beginning Assets + Ending Assets​Total Sales​where:Total Sales=Annual sales totalBeginning Assets=Assets at start of yearEnding Assets=Assets at end of year​

The asset turnover ratio uses the value of a company’s assets in the denominator of the formula. To determine the value of a company’s assets, the average value of the assets for the year needs to first be calculated.

1. Locate the value of the company’s assets on the balance sheet as of the start of the year.
2. Locate the ending balance or value of the company’s assets at the end of the year.
3. Add the beginning asset value to the ending value and divide the sum by two, which will provide an average value of the assets for the year.
4. Locate total sales—it could be listed as revenue—on the income statement.
5. Divide total sales or revenue by the average value of the assets for the year.

What the Asset Turnover Ratio Can Tell You

Typically, the asset turnover ratio is calculated on an annual basis. The higher the asset turnover ratio, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets.

The asset turnover ratio tends to be higher for companies in certain sectors than in others. Retail and consumer staples, for example, have relatively small asset bases but have high sales volume—thus, they have the highest average asset turnover ratio. Conversely, firms in sectors such as utilities and real estate have large asset bases and low asset turnover.

Since this ratio can vary widely from one industry to the next, comparing the asset turnover ratios of a retail company and a telecommunications company would not be very productive. Comparisons are only meaningful when they are made for different companies within the same sector.

Example of How to Use the Asset Turnover Ratio

Let’s calculate the asset turnover ratio for four companies in the retail and telecommunication-utilities sectors for FY 2020—Walmart Inc. (WMT), Target Corporation (TGT), AT&T Inc. (T), and Verizon Communications Inc. (VZ).

What Are Assets Under Management (AUM)?

Assets under management (AUM) is the total market value of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company.

In the calculation of AUM, some financial institutions include bank deposits, mutual funds, and cash in their calculations. Others limit it to funds under discretionary management, where the investor assigns authority to the company to trade on their behalf.

Overall, AUM is only one aspect used in evaluating a company or investment. It is also usually considered in conjunction with management performance and management experience. However, investors often consider higher investment inflows and higher AUM comparisons as a positive indicator of quality and management experience.

Understanding Assets Under Management

Assets under management refers to how much money a hedge fund or financial institution is managing for their clients. AUM is the sum of the market value for all of the investments managed by a fund or family of funds, a venture capital firm, brokerage company, or an individual registered as an investment advisor or portfolio manager.

Used to indicate the size or amount, AUM can be segregated in many ways. It can refer to the total amount of assets managed for all clients, or it can refer to the total assets managed for a specific client. AUM includes the capital the manager can use to make transactions for one or all clients, usually on a discretionary basis.

For example, if an investor has $50,000 invested in a mutual fund, those funds become part of the total AUM—the pool of funds. The fund manager can buy and sell shares following the fund’s investment objective using all of the invested funds without obtaining any additional special permissions.

Within the wealth management industry, some investment managers may have requirements based on AUM. In other words, an investor may need a minimum amount of personal AUM for that investor to be qualified for a certain type of investment, such as a hedge fund. Wealth managers want to ensure the client can withstand adverse markets without taking too large of a financial hit. An investor’s individual AUM can also be a factor in determining the type of services received from a financial advisor or brokerage company. In some cases, individual assets under management may also coincide with an individual’s net worth.

Calculating Assets Under Management

Methods of calculating assets under management vary among companies. Assets under management depends on the flow of investor money in and out of a particular fund and as a result, can fluctuate daily. Also, asset performance, capital appreciation, and reinvested dividends will all increase the AUM of a fund. Also, total firm assets under management can increase when new customers and their assets are acquired.

Factors causing decreases in AUM include decreases in market value from investment performance losses, fund closures, and a decrease in investor flows. Assets under management can be limited to all of the investor capital invested across all of the firm’s products, or it can include capital owned by the investment company executives.

In the United States, the Securities and Exchange Commission (SEC) has AUM requirements for funds and investment firms in which they must register with the SEC. The SEC is responsible for regulating the financial markets to ensure that it functions in a fair and orderly manner. The SEC requirement for registration can range between $25 million to $110 million in AUM, depending on several factors, including the size and location of the firm.

Why AUM Matters

Firm management will monitor AUM as it relates to investment strategy and investor product flows in determining the strength of the company. Investment companies also use assets under management as a marketing tool to attract new investors. AUM can help investors get an indication of the size of a company’s operations relative to its competitors.

AUM may also be an important consideration for the calculation of fees. Many investment products charge management fees that are a fixed percentage of assets under management. Also, many financial advisors and personal money managers charge clients a percentage of their total assets under management. Typically, this percentage decreases as the AUM increases; in this way, these financial professionals can attract high-wealth investors.

Real-Life Examples of Assets Under Management

When evaluating a specific fund, investors often look at its AUM since it functions as an indication of the size of the fund. Typically, investment products with high AUMs have higher market trading volumes making them more liquid, meaning investors can buy and sell the fund with ease.

SPY

For example, the SPDR S&P 500 ETF (SPY) is one of the largest equity exchange-traded funds on the market. An ETF is a fund that contains a number of stocks or securities that match or mirror an index, such as the S&P 500. The SPY has all 500 of the stocks in the S&P 500 index.

As of Mar. 11, 2022, the SPY had assets under management of $380.7 billion with an average daily trading volume of 113 million shares. The high trading volume means liquidity is not a factor for investors when seeking to buy or sell their shares of the ETF.

EDOW

The First Trust Dow 30 Equal Weight ETF (EDOW) tracks the 30 stocks in the Dow Jones Industrial Average (DJIA). As of Mar. 11, 2022, the EDOW had assets under management of $130 million and much lower trading volume compared to the SPY, averaging approximately 53,000 shares per day. Liquidity for this fund could be a consideration for investors, meaning it could be difficult to buy and sell shares at certain times of the day or week.

What Is the Average Annual Return (AAR)?

The average annual return (AAR) is a percentage used when reporting the historical return, such as the three-, five-, and 10-year average returns of a mutual fund. The average annual return is stated net of a fund’s operating expense ratio. Additionally, it does not include sales charges, if applicable, or portfolio transaction brokerage commissions.

In its simplest terms, the average annual return (AAR) measures the money made or lost by a mutual fund over a given period. Investors considering a mutual fund investment will often review the AAR and compare it with other similar mutual funds as part of their mutual fund investment strategy.

Understanding the Average Annual Return (AAR)

When you are selecting a mutual fund, the average annual return is a helpful guide for measuring a fund’s long-term performance. However, investors should also look at a fund’s yearly performance to fully appreciate the consistency of its annual total returns.

For example, a five-year average annual return of 10% looks attractive. However, if the yearly returns (those that produced the average annual return) were +40%, +30%, -10%, +5% and -15% (50 / 5 = 10%), performance over the past three years warrants examination of the fund’s management and investment strategy.

Components of an Average Annual Return (AAR)

There are three components that contribute to the average annual return (AAR) of an equity mutual fund: share price appreciation, capital gains, and dividends.

Share Price Appreciation

Share price appreciation results from unrealized gains or losses in the underlying stocks held in a portfolio. As the share price of a stock fluctuates over a year, it proportionately contributes to or detracts from the AAR of the fund that maintains a holding in the issue.

For example, the American Funds AMCAP Fund’s top holding is Netflix (NFLX), which represents 3.7% of the portfolio’s net assets as of Feb. 29, 2020. Netflix is one of 199 equities in the AMCAP fund. Fund managers can add or subtract assets from the fund or change the proportions of each holding as needed to meet the fund’s performance objectives. The fund’s combined assets have contributed to the portfolio’s 10-year AAR of 11.58% through Feb. 29, 2020.

Capital Gains Distributions

Capital gains distributions paid from a mutual fund result from the generation of income or sale of stocks from which a manager realizes a profit in a growth portfolio. Shareholders can opt to receive the distributions in cash or reinvest them in the fund. Capital gains are the realized portion of AAR. The distribution, which reduces share price by the dollar amount paid out, represents a taxable gain for shareholders.

A fund can have a negative AAR and still make taxable distributions. The Wells Fargo Discovery Fund paid a capital gain of $2.59 on Dec. 11, 2015, despite the fund having an AAR of negative 1.48%.

Dividends

Quarterly dividends paid from company earnings contribute to a mutual fund’s AAR and also reduce the value of a portfolio’s net asset value (NAV). Like capital gains, dividend income received from the portfolio can be reinvested or taken in cash.

Large-cap stock funds with positive earnings typically pay dividends to individual and institutional shareholders. These quarterly distributions comprise the dividend yield component of a mutual fund’s AAR. The T. Rowe Price Dividend Growth Fund has a trailing 12-month yield of 1.36%, a contributing factor to the fund’s three-year AAR of 15.65% through Feb. 29, 2020.

Special Considerations

Calculating an average annual return is much simpler than the average annual rate of return, which uses a geometric average instead of a regular mean. The formula is: [(1+r₁) x (1+r₂) x (1+r₃) x … x (1+r_i)] ^(1/n) – 1, where r is the annual rate of return and n is the number of years in the period.

The average annual return is sometimes considered less useful for giving a picture of the performance of a fund because returns compound rather than combine. Investors must pay attention when looking at mutual funds to compare the same types of returns for each fund. 

What Is Average Annual Growth Rate (AAGR)?

The average annual growth rate (AAGR) reports the mean increase in the value of an individual investment, portfolio, asset, or cash flow on an annualized basis. It doesn’t take compounding into account.

Formula for Average Annual Growth Rate (AAGR)

$\begin{aligned} &AAGR = \frac{GR_A + GR_B + \dotso + GR_n}{N} \\ &\textbf{where:}\\ &GR_A=\text{Growth rate in period A}\\ &GR_B=\text{Growth rate in period B}\\ &GR_n=\text{Growth rate in period }n\\ &N=\text{Number of payments}\\ \end{aligned}$​AAGR=NGRA​+GRB​+…+GRn​​where:GRA​=Growth rate in period AGRB​=Growth rate in period BGRn​=Growth rate in period nN=Number of payments​

Understanding the Average Annual Growth Rate (AAGR)

The average annual growth rate helps determine long-term trends. It applies to almost any kind of financial measure including growth rates of profits, revenue, cash flow, expenses, etc. to provide the investors with an idea about the direction wherein the company is headed. The ratio tells you your average annual return.

The average annual growth rate is a calculation of the arithmetic mean of a series of growth rates. AAGR can be calculated for any investment, but it will not include any measure of the investment’s overall risk, as measured by its price volatility. Furthermore, the AAGR does not account for periodic compounding.

AAGR is a standard for measuring average returns of investments over several time periods on an annualized basis. You’ll find this figure on brokerage statements and in a mutual fund’s prospectus. It is essentially the simple average of a series of periodic return growth rates.

One thing to keep in mind is that the periods used should all be of equal length—for instance, years, months, or weeks—and not to mix periods of different duration.

AAGR Example

The AAGR measures the average rate of return or growth over a series of equally spaced time periods. As an example, assume an investment has the following values over the course of four years:

• Beginning value = $100,000
• End of year 1 value = $120,000
• End of year 2 value = $135,000
• End of year 3 value = $160,000
• End of year 4 value = $200,000

The formula to determine the percentage growth for each year is:

$\text{Simple percentage growth or return} = \frac{\text{ending value}}{\text{beginning value}} – 1$Simple percentage growth or return=beginning valueending value​−1

Thus, the growth rates for each of the years are as follows:

• Year 1 growth = $120,000 / $100,000 – 1 = 20%
• Year 2 growth = $135,000 / $120,000 – 1 = 12.5%
• Year 3 growth = $160,000 / $135,000 – 1 = 18.5%
• Year 4 growth = $200,000 / $160,000 – 1 = 25%

The AAGR is calculated as the sum of each year’s growth rate divided by the number of years:

$AAGR = \frac{20 \% + 12.5 \% + 18.5 \% + 25 \%}{4} = 19\%$AAGR=420%+12.5%+18.5%+25%​=19%

In financial and accounting settings, the beginning and ending prices are usually used. Some analysts may prefer to use average prices when calculating the AAGR depending on what is being analyzed.

As another example, consider the five-year real gross domestic product (GDP) growth for the United States over the last five years. The U.S. real GDP growth rates for 2017 through 2021 were 2.3%, 2.9%, 2.3%, -3.4%, and 5.7%, respectively. Thus, the AAGR of U.S. real GDP over the last five years has been 1.96%, or (2.3% + 2.9% + 2.3% + -3.4% + 5.7%) / 5.

AAGR vs. Compound Annual Growth Rate

AAGR is a linear measure that does not account for the effects of compounding. The above example shows that the investment grew an average of 19% per year. The average annual growth rate is useful for showing trends; however, it can be misleading to analysts because it does not accurately depict changing financials. In some instances, it can overestimate the growth of an investment.

For example, consider an end-of-year value for year 5 of $100,000 for the AAGR example above. The percentage growth rate for year 5 is -50%. The resulting AAGR would be 5.2%; however, it is evident from the beginning value of year 1 and the ending value of year 5, the performance yields a 0% return. Depending on the situation, it may be more useful to calculate the compound annual growth rate (CAGR).

The CAGR smooths out an investment’s returns or diminishes the effect of the volatility of periodic returns. 

Formula for CAGR

$CAGR = \frac{\text{Ending Balance}}{\text{Beginning Balance}}^{\frac{1}{\text{\# Years}}} – 1$CAGR=Beginning BalanceEnding Balance​# Years1​−1

Using the above example for years 1 through 4, the CAGR equals:

$CAGR = \frac{\$200,000}{\$100,000}^{\frac{1}{4}}- 1 = 18.92\%$CAGR=$100,000$200,000​41​−1=18.92%

For the first four years, the AAGR and CAGR are close to one another. However, if year 5 were to be factored into the CAGR equation (-50%), the result would end up being 0%, which sharply contrasts the result from the AAGR of 5.2%.

Limitations of the AAGR

Because AAGR is a simple average of periodic annual returns, the measure does not include any measure of the overall risk involved in the investment, as calculated by the volatility of its price. For instance, if a portfolio grows by a net of 15% one year and 25% in the next year, the average annual growth rate would be calculated to be 20%.

To this end, the fluctuations occurring in the investment’s return rate between the beginning of the first year and the end of the year are not counted in the calculations thus leading to some errors in the measurement.

A second issue is that as a simple average it does not care about the timing of returns. For instance, in our example above, a stark 50% decline in year 5 only has a modest impact on total average annual growth. However, timing is important, and so CAGR may be more useful in understanding how time-chained rates of growth matter.