What is the formula for the asset turnover ratio?

What is the formula for the asset turnover ratio?

• A. Net sales divided by average total assets
• B. Net sales divided by total assets
• C. Gross profit divided by total assets
• D. Net income divided by average total assets

Answer: (A)

Asset turnover shows how efficiently a company uses its assets to generate sales over a period. The best measure for that efficiency is net sales divided by average total assets. Net sales reflect the actual revenue from selling goods or services after returns, allowances, and discounts, which is what the asset base is used to generate. Using average total assets smooths out fluctuations during the period, giving a more accurate sense of how much sales are produced per dollar of asset investment on average. Using gross profit or net income would mix in profitability rather than efficiency of asset use, and using only ending total assets can distort the picture because the asset base can vary during the period.

Asset turnover shows how efficiently a company uses its assets to generate sales over a period. The best measure for that efficiency is net sales divided by average total assets. Net sales reflect the actual revenue from selling goods or services after returns, allowances, and discounts, which is what the asset base is used to generate. Using average total assets smooths out fluctuations during the period, giving a more accurate sense of how much sales are produced per dollar of asset investment on average.

Using gross profit or net income would mix in profitability rather than efficiency of asset use, and using only ending total assets can distort the picture because the asset base can vary during the period.