Total asset turnover indicates the firm's
A. liquidity
B. debt postition
C. ability to use its assets to generate sales
D. profitability
I can't remember the name of the ratio right now, but I remember reading about an asset ratio that is a metric for asset turnover.....
the ratio by itself is meaningless bbut when compared with company and industry benchmarks it can tell financial managers if the company physical capital is depreciated and out of date or if the company has spent too much cas capital on new machines.
I can't explain myself any better than that right now.
I think (C) is the correct answer
The correct answer is C. Total asset turnover indicates the firm's ability to use its assets to generate sales. This ratio is calculated by dividing net sales by the average total assets.
To calculate the total asset turnover ratio, you need the firm's net sales and average total assets. Net sales can be found on the income statement, while average total assets can be calculated by adding the beginning and ending total assets and dividing the sum by 2.
The ratio itself is a measure of how efficiently a company is using its assets to generate sales. A higher ratio indicates that the company is generating more sales per dollar of assets, which suggests better performance in utilizing its assets. Conversely, a lower ratio may indicate that the company is not effectively using its assets to generate sales.
However, as you mentioned, the ratio alone may not be very meaningful. It becomes more useful when compared with company and industry benchmarks. By comparing the ratio to benchmarks, financial managers can gain insights into various aspects of the company's operations. For example, if the ratio is lower compared to industry standards, it may indicate that the company's physical capital is depreciated or out of date. On the other hand, a higher ratio may suggest that the company has spent a significant amount of cash capital on acquiring new machines.
Therefore, in this given context, option C is indeed the correct answer as total asset turnover is primarily used to assess a firm's ability to generate sales using its assets efficiently.