Which is the correct formula for asset turnover?

Which is the correct formula for asset turnover?

• A. Total Assets / Sales
• B. Sales / Total Assets
• C. Net Income / Assets
• D. Gross Margin / Assets

Answer: (B)

Asset turnover shows how effectively a company uses its assets to generate sales. The correct formula is Sales divided by Total Assets (often using average total assets to smooth changes). This ratio tells you how many dollars of sales are produced for every dollar of assets. The other forms mix in profitability measures or invert the relationship, which doesn’t reflect asset utilization. For example, with sales of 500 and assets of 250, asset turnover is 2.0, whereas reversing the ratio would yield 0.5 and misstate the efficiency.

Asset turnover shows how effectively a company uses its assets to generate sales. The correct formula is Sales divided by Total Assets (often using average total assets to smooth changes). This ratio tells you how many dollars of sales are produced for every dollar of assets. The other forms mix in profitability measures or invert the relationship, which doesn’t reflect asset utilization. For example, with sales of 500 and assets of 250, asset turnover is 2.0, whereas reversing the ratio would yield 0.5 and misstate the efficiency.