Every company is in a race to book maximum profits. Investors analyze charts, graphs to maximize the worth. The market is in a rush. Accountants restlessly work to meet deadlines and come up with huge figures at the end of the year. Then accounting asset turnover and Inventory turnover comes up that matters the most.
Asset Turnover vs Inventory Turnover
The main difference between Asset Turnover and Inventory Turnover is that the asset turnover ratio measures the profits booked using the assets. In contrast, the inventory asset ratio is calculated when we divide the sales with the available inventory.
The asset turnover ratio indicates the revenue generated through its assets available. It’s used to calculate the efficiency of a company that uses its assets to generate profit. The more the asset turnover ratio, the more efficient a company is to generate money.
The inventory turnover ratio is the calculated figure through which a company generates profits by selling or replacing goods or inventory. To calculate the value of the ratio, a person has to divide the total sales by the average value of the Inventory. This formula will give you the inventory turnover ratio.
Comparison Table Between Asset Turnover and Inventory Turnover
| Parameters of Comparison | Asset Turnover | Inventory Turnover |
| Definition | It’s defined as the value of revenue generated after using the total assets available to the company. | It’s defined as the value generated after selling goods or replacing them and maximizing profits. |
| Formula | Calculated by dividing total sales with (beginning asset+ ending assets)/2. | Calculated by dividing total goods sold by the average value of assets available. |
| Indications | The higher the asset turnover ratio will be, the more a company will experience profits. | Sometimes a low inventory Turnover ratio is a good thing, such as when the price could go up. |
| Consideration | Asset Turnover uses beginning assets, ending assets, and total sales. | Inventory Turnover uses goods and total sales. |
| Value-wise | The asset Turnover ratio is quite more valuable since the higher the ratio, the higher the sales. | Inventory Turnover ratio is a bit less valuable because of high or low ratio, inefficiency or overstocking issues. |
What is Asset Turnover?
Profits are of great value since it drives your company and hence makes your firm valuable. Investors also make considerable investments in those firms which are of high values. Then there comes the asset turnover ratio. This ratio is essential to calculate how much profits have been booked in a financial year, considering the beginning assets and ending assets.
The calculation goes with marking of assets of a company on the balance sheet at the beginning of the year and locating the ending balance at the end of the year. Add these two values and divide by 2, which will give an average value. Calculate total sales or revenue of the same year, divide it with the value of the average calculated.
If a company experiences less asset ratio, it implies that it cannot make capable booking profits out of its values or assets. A large ratio means most of the company’s assets remained with them and made money as well.
Investors analyze this ratio to compare and compete with similar companies. A company’s asset ratio can be changed by larger asset sales or significant asset buying in a financial year.
What is Inventory Turnover?
Profits matter in the end. Be it from an asset or from the stocks available in a company. Inventory turnover deals with the inventory available with the firm through which profits are made by selling or replacing goods. Then term Inventory Turnover ratio comes up, which means a calculated figure after using the stocks to generate revenue.
This ratio is of great use in itself. This ratio can help businesses and companies make an ideal decision on manufacturing goods, pricing them, and marketing accordingly. This calculates the capability of a company to replace goods after being sold in the first place.
The calculation part is straightforward. Calculate the average value of goods. Then divide the sales generates by this number. You will get your desired output.
A low ratio says weak or lesser sales, and maybe the inventory is in excess. A high ratio or faster ratio means strong sales and inadequate inventory. These ratios help decide future growth and help plan better to avoid any loss or overstocking.
Main Differences Between Asset Turnover and Inventory Turnover
- Asset turnover is the revenue generated through assets available. On the other hand, inventory turnover refers to the revenue generated through selling and replacing goods.
- The calculation in asset turnover is quite complex since it’s done on the balance sheet. In contrast to that, inventory turnover calculation is simple.
- A high ratio in asset turnover means enormous profits. In comparison, a high ratio in inventory means either good sales or insufficient stocks.
- A lower ratio in the case of asset turnover means a company didn’t make many profits. On the other hand, a lesser ratio of inventory turnover will mean overstocking.
- Using asset turnover ratio, an investor can compete with similar companies. In contrast, using the inventory turnover ratio, and the analyst can change pricing, manufacturing, and future purchases.
Conclusion
Both stands equal because both contribute towards the profits. Asset turnover ratio decides the net profits in one go, and inventory turnover ratio gives an idea of future perspective. An investor needs to analyze and control both of the parts to maintain a balance and optimizing profits.
However, it seems quite simple while reading, but it’s a bit complex thing for accountants. It takes days to calculate a single value. It takes time and works to analyze and elevate the graph of profits and the reputation of a company.
References
- https://link.springer.com/article/10.1023/A:1012430513430
- https://pubsonline.informs.org/doi/abs/10.1287/mnsc.1040.0298