Question

Question: How is total asset turnover computed? Why would a financial statement user be interested in total asset turnover?

Short answer

The total asset turnover is computed by dividing the net sales of the company with its average total assets.

A financial statement user be interested in total asset turnover to determine the company’s ability to generate sales and earn income.

Step-by-step solution

Total asset turnover

The asset turnover ratio is a profitability ratio. It measures how efficiently a company uses its assets to generate sales.

How to calculate asset turnover

The numerator reflects the net amounts earned from the sale of products and services. The denominator reflects the average total resources devoted to operating the company and generating sales.

Need to calculate total asset turnover

A company’s assets are important in determining its ability to generate sales and earn income. Managers devote much attention to deciding what assets a company acquires, how much it invests in assets, and how to use assets most efficiently and effectively. One important measure of a company’s ability to use its assets is total asset turnover,