What are Average Total Assets?

Average total assets is defined as the average amount of assets recorded on a company's balance sheet at the end of the current year and preceding year. This figure is most commonly used in comparison to the total sales figure for the current year, to determine the amount of assets required to support a certain amount of sales. This is a useful comparison, since a low asset level in comparison to sales implies that the management team is making highly efficient use of its assets in running the business.

How to Calculate Average Total Assets

To calculate average total assets, divide the aggregate amount of assets on the books at the end of the year by the aggregate amount of assets at the end of the preceding year, and then divide by two. The formula is as follows:

(Aggregate assets at end of current year + Aggregate assets at end of preceding year) ÷ 2 = Average total assets

The comparison to total sales is less useful for a very successful company that has accumulated a large amount of cash, since the cash figure is included in the calculation of average total assets. In this case, the calculation can be modified to exclude more than a modest amount of cash.

Another variation is to average the aggregate amount of assets at the end of each month. By doing so, the calculation avoids any unusual dip or spike in the total amount of assets that may occur if only the year-end asset figures were used.

Advantages of Using Average Total Assets

There are several advantages to using the average total assets figure, which are as follows:

Important measurement component. The average total assets figure is used in a number of ratios that compare assets to sales, profits, or liabilities. Consequently, it is critical to understand how this measure is derived, so that you can assemble a set of accurate performance metrics for your organization.
Reveals selling efficiency. A common metric is to compare total sales to average assets, to see how efficiently management is using its asset base to generate sales. A high ratio of sales to average assets indicates good asset management.