What does the asset turnover ratio measure?

The asset turnover ratio measures how efficiently a company utilizes its assets to generate sales. Specifically, it is calculated by dividing a company’s total sales revenue by its average total assets over a certain period. This ratio indicates how well the company is using its assets to produce revenue, with a higher ratio suggesting a more efficient use of assets.

In the context of the choices provided, the correct answer focuses on the relationship between sales and total assets, which directly conveys the purpose of the asset turnover ratio. It helps investors and management understand whether the company is effectively leveraging its assets for business growth.

This insight can be vital for making informed decisions regarding investments and operational strategies, as an efficient asset turnover ratio often signifies a well-managed company that is capable of generating substantial revenue relative to its asset base.