Which of the following ratios measure efficiency?

Which of the following ratios measure efficiency?

• A. Gross profit margin
• B. Asset turnover
• C. Operating profit margin
• D. Return on capital employed

Answer: (B)

The asset turnover ratio is a key performance indicator that measures the efficiency of a company's use of its assets to generate sales revenue. This ratio is calculated by dividing the total revenue by the average total assets for the period. A higher asset turnover ratio indicates that a company is using its assets more effectively to produce sales, highlighting operational efficiency. In the context of financial ratios, measuring efficiency typically involves analyzing how well a company utilizes its resources to maximize output or returns. The asset turnover ratio signifies how efficiently a company turns its assets into revenue, making it a crucial tool for evaluating operational performance. While other ratios mentioned relate to profitability or capital efficiency, they do not directly measure the efficiency of asset usage in generating revenue. For instance, gross profit margin and operating profit margin focus on profit relative to sales rather than the efficiency of using assets. Return on capital employed, while indicating the profitability derived from capital investments, does not specifically target the efficiency of asset turnover in sales generation. Thus, the asset turnover ratio stands out as the primary measure of efficiency among the listed options.

The asset turnover ratio is a key performance indicator that measures the efficiency of a company's use of its assets to generate sales revenue. This ratio is calculated by dividing the total revenue by the average total assets for the period. A higher asset turnover ratio indicates that a company is using its assets more effectively to produce sales, highlighting operational efficiency.

In the context of financial ratios, measuring efficiency typically involves analyzing how well a company utilizes its resources to maximize output or returns. The asset turnover ratio signifies how efficiently a company turns its assets into revenue, making it a crucial tool for evaluating operational performance.

While other ratios mentioned relate to profitability or capital efficiency, they do not directly measure the efficiency of asset usage in generating revenue. For instance, gross profit margin and operating profit margin focus on profit relative to sales rather than the efficiency of using assets. Return on capital employed, while indicating the profitability derived from capital investments, does not specifically target the efficiency of asset turnover in sales generation. Thus, the asset turnover ratio stands out as the primary measure of efficiency among the listed options.