Total Asset Turnover

1. Under what circumstances would the “total asset turnover” of several firms help you
make a decision?

Total asset turnover (revenue/ assets) reflects how much revenue a firm generates from each dollar in assets.

(a) When deciding which was holding excess inventory.
(b) When deciding which had the potential for growth in the future
(c) When deciding which was managing accounts receivable well.
(d) When deciding which was more likely to take out a loan in the near future.


The answer is (b)

(a) When deciding which was holding excess inventory.

No. While inventory is an asset, it is only one of several types of assets that contribute to the denominator in this ratio. Teasing out inventory is impossible from the asset turnover ratio.

(b) When deciding which had the potential for growth in the future

Yes. A high ratio of revenue to assets could very well mean that a firm is in a position to use some of its revenue to acquire more assets with which to generate even more revenue, i.e. grow.

(c) When deciding which was managing accounts receivable well.

No. Managing accounts receivable well means collecting payment quickly after making a sale. It is time-dependent and Asset Turnover reveals nothing about the rate of revenue accruement.

(d) When deciding which was more likely to take out a loan in the near future.

No. A firm is unlikely to take out a loan if it doesn't have to (assuming the loan is not interest-free), to avoid incurring interest costs. The most likely reason it would do so is to take care of current liabilities. A ratio involving liabilities would thus be much more informative about the likelihood of taking out a loan.

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