Question

Describe and illustrate the use of asset turnover in evaluating a company’s operating performance.

Answer 1

Asset turnover ratio that measures the efficiency of a company's use of its assets in generating sales revenue to the company. This normally means that Asset contribution towards revenue generation of a company.

Normally company with low profit margins tend to have higher asset turnover as compared to high profit margins company. The higher the asset turnover ratio the more efficient companies.

It shows whether the company is making the most use of its asset and identifying the weaknesses in it. This indicates efficiency of capital development by a company also.

Companies which are capital intensive are most likely to be affected by this type of ratios like energy company, transportation company ,manufacturing company. Contrary it may not be an appropriate ratio for knowledge intensive business like consultancy firm.