Question

why does the financial sector have such low asset turnover ratios compared to other industries?
why is the asset turnover ratio important for financial companies?

Answer 1

Followings are the reasons for low asset turnover in financial sectors:

• Many acquisitions are taking place in financial sectors. In that they are purchasing the weak assets of another company. If those assets are failed to generate positive returns, then the acquired company's asset turnover will reduce.
• During economic slowdown if the company is not able to meet their sales target quarterly, the it will impact the total assets turnover negatively.
• Sometimes high cash reserves also decline the asset turnover. Because these are not being utilized for capital growth of the corporation for a long period of time.
• Low average days of receivables also decreases the asset turnover. Because it will evaluate how long an organisation takes to recover the receivables for which they have already provided the service

Followings are the reasons why asset turnover is important:

• Asset turnover measures efficiency of the company and evaluates how effectively they utilized their assets to generate revenue.
• Higher the asset turnover higher will be the efficiency for the corporation.
• It will measure the average assets value in the balance sheet at the end of the year.
• Asset turnover calculates operating performance of the corporation. That means it shows the ability to generate net sales from fixed assets.

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