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

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

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

Answer: (A)

Asset turnover shows how efficiently the assets invested in the business are used to generate sales. It is calculated by dividing sales by capital employed, so how many units of sales each unit of capital employed can generate. Capital employed is the funds invested in the business’s assets (often total assets minus current liabilities, or equity plus long-term debt, depending on convention). For example, if a company has sales of 1,000,000 and capital employed of 500,000, asset turnover is 2, meaning each dollar of capital employed supports 2 dollars of sales. The other formulas mix profitability with asset use: gross profit divided by sales is gross margin, not asset efficiency; net profit divided by capital employed is ROCE, a profitability measure, not the asset-use efficiency ratio.

Asset turnover shows how efficiently the assets invested in the business are used to generate sales. It is calculated by dividing sales by capital employed, so how many units of sales each unit of capital employed can generate. Capital employed is the funds invested in the business’s assets (often total assets minus current liabilities, or equity plus long-term debt, depending on convention).

For example, if a company has sales of 1,000,000 and capital employed of 500,000, asset turnover is 2, meaning each dollar of capital employed supports 2 dollars of sales.

The other formulas mix profitability with asset use: gross profit divided by sales is gross margin, not asset efficiency; net profit divided by capital employed is ROCE, a profitability measure, not the asset-use efficiency ratio.