Asset turnover measures how efficiently assets are used to generate income. Which formula represents asset turnover?

Asset turnover measures how efficiently assets are used to generate income. Which formula represents asset turnover?

• A. = sales / capital employed
• B. = capital employed / sales
• C. = gross profit / sales
• D. = net profit / capital employed

Answer: (A)

The main idea is to see how efficiently the assets are used to generate sales. Asset turnover tells you how many dollars of sales come from each dollar of capital employed. So you calculate it as sales (revenue) divided by capital employed. Capital employed represents the funds used in the business to generate those sales—typically total assets minus current liabilities, or equivalently equity plus long‑term liabilities. A higher asset turnover means you’re getting more sales from the same amount of capital, which signals better asset-use efficiency. Using the inverse—capital employed divided by sales—would measure how much capital is needed per unit of sales, not how much sales you get per unit of capital, so it isn’t asset turnover. Using gross profit or net profit in the numerator shifts the focus to profitability rather than how effectively assets are used to generate sales.

The main idea is to see how efficiently the assets are used to generate sales. Asset turnover tells you how many dollars of sales come from each dollar of capital employed. So you calculate it as sales (revenue) divided by capital employed. Capital employed represents the funds used in the business to generate those sales—typically total assets minus current liabilities, or equivalently equity plus long‑term liabilities.

A higher asset turnover means you’re getting more sales from the same amount of capital, which signals better asset-use efficiency. Using the inverse—capital employed divided by sales—would measure how much capital is needed per unit of sales, not how much sales you get per unit of capital, so it isn’t asset turnover. Using gross profit or net profit in the numerator shifts the focus to profitability rather than how effectively assets are used to generate sales.