Which ratio measures how effectively a company uses its assets to generate sales?

The asset turnover ratio measures how effectively a company uses its assets to generate sales.

It is commonly calculated as net sales revenue divided by average total assets. Average assets usually means the beginning-of-period total assets plus the ending-period total assets, divided by two. If a company produces $2 million in sales from average assets of $1 million, its asset turnover is 2.0 times.

A higher ratio generally indicates that a business generates more revenue from each unit invested in assets, but comparisons are most useful between similar companies. Retailers often have relatively high turnover because they sell large volumes with thin margins, while capital-intensive utilities may have lower turnover. A high figure is not automatically superior if it comes with weak profitability or underinvestment.

Asset turnover is one component of the DuPont analysis of return on equity, where profitability is examined through profit margin, asset efficiency, and financial leverage. It is distinct from inventory turnover and receivables turnover, which focus on particular asset categories rather than the asset base as a whole.