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Which of the following ratios is used to measure a firm's efficiency at using its assets?

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Solution

The ratio commonly used to measure a firm's efficiency at using its assets is the Asset Turnover Ratio. This financial metric indicates how effectively a company utilizes its assets to generate sales. The Asset Turnover Ratio is calculated using the following formula:

Asset Turnover Ratio=Net SalesAverage Total Assets \text{Asset Turnover Ratio} = \frac{\text{Net Sales}}{\text{Average Total Assets}}

Where:

  • Net Sales refers to the total revenue from sales, minus returns, allowances, and discounts.
  • Average Total Assets is typically calculated by averaging the total assets at the beginning and end of a period.

A higher Asset Turnover Ratio suggests greater efficiency in managing assets, as it indicates that the company is generating more sales per dollar of assets it has on the books.

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