What does the asset turnover ratio measure?

The asset turnover ratio specifically measures how efficiently a company utilizes its assets to generate revenue. This ratio is calculated by dividing total sales or revenue by the average total assets. A higher asset turnover ratio indicates that a company is more effective in using its assets to produce sales, which is a critical indicator of operational efficiency.

This ratio plays a crucial role in analyzing a company's performance, as it directly reflects how well the company is managing its assets concerning its sales volume. Investors and analysts often look at this metric to assess a firm's asset utilization and make comparisons with industry peers. Understanding this ratio helps stakeholders gauge whether a company is achieving optimal performance from its assets.