Asset turnover

Definition

Asset turnover measures how efficiently a company uses its assets to generate sales revenue. It is calculated by dividing net sales by average total assets.

5 Must Know Facts For Your Next Test

1. A higher asset turnover ratio indicates better utilization of assets in generating revenue.
2. The formula for asset turnover is Net Sales / Average Total Assets.
3. It is an important metric for assessing the operational efficiency of a business unit or investment project.
4. Asset turnover can vary significantly across different industries, reflecting varying capital intensity levels.
5. Managers use asset turnover to identify areas where improvements in asset management could lead to increased profitability.

Review Questions

• How do you calculate the asset turnover ratio?
• Why is a higher asset turnover ratio generally considered favorable?
• In what ways can managers use the asset turnover ratio to improve business performance?

Related terms

Return on Investment (ROI):

A measure of financial performance calculated by dividing net profit by total investment.

Residual Income:

The amount of income that remains after subtracting the minimum required return on a company's operating assets.

Economic Value Added (EVA):

A measure of a company's financial performance based on residual wealth, calculated by deducting the cost of capital from operating profit.