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An asset ratio compares your assets to another part of your business. So, you could be comparing assets to revenue, profit, the number of employees or their salaries – whatever you wanted to measure. For example, if your assets/salaries ratio increases, you may have staff ordering unnecessary equipment.

It is a great ratio to assess the viability of a business. It is also a good way to learn if you are spending money un-necessarily on assets that are not helping increase your profits, and therefore are not warranted.

In short: the lower the ratio, the harder your assets are working.

Lowering the ratio

One of the ways of seeing how profitable your business is, is to look at your net profit margin or gross margin. But an asset ratio tells you how hard your assets are working.

Increasing your sales with the same assets

What you are looking to do here is get your assets working harder so that they’re contributing to your profits, rather than detracting from them.

Who buys the assets in your business? Were they planned and budgeted for? Staff need direction when purchasing assets. It is common – and understandable – for an employee to order the latest technology, software, desks or vehicles which see your assets creep up, but your sales and profits don’t.

If you do buy assets, make sure the ratio increases – there’s no point adding a $1m piece of machinery and end up making less profit for the year. Before purchasing assets they need to be planned and budgeted for.

Maintain or increase sales with fewer assets

• Do you need all your assets? – Conduct a thorough review of all your assets and of each one, ask yourself: are they helping to generate a profit? Or are they just sitting there, and could be sold instead? Any un-used machinery or equipment could be sold to generate cash for your working capital.
• Would you be better off leasing assets? – Consider this: you could sell off some assets and then lease them back only when you need them. That way you’re reducing your assets but still making a profit.

Why is it important?

The short answer is that the purpose of any business is to generate profit, and if your assets are not helping you do that, you’re compromising your ability to make money. It is important to understand your asset ratio and make sure you’re not buying or retaining assets you don’t need.

Summary

In general, a low ratio indicates that the company is making good use of its existing assets. A high ratio is an indicator either of low sales or that the business has over-invested in land or equipment that is not benefiting the bottom line. If your asset review indicates a high ratio, it’s time to take a long hard look at your asset inventory and decide what stays and what can be converted into cash.