Which formula best represents the capital asset turnover ratio in this approach?

Which formula best represents the capital asset turnover ratio in this approach?

• A. PP&E / Revenue
• B. Revenue / PP&E (End of Period)
• C. Revenue / Inventory
• D. Net Income / PP&E

Answer: (B)

Capital asset turnover measures how efficiently a company uses its capital assets to generate sales. It’s calculated as revenue divided by the capital asset base, typically the net PP&E (property, plant, and equipment minus depreciation). Using ending net PP&E gives the asset base at period end, which aligns with the period’s revenue to reflect how effectively those assets generated sales during the period. So the best representation is revenue divided by ending net PP&E. A higher ratio means more revenue per dollar of capital assets, indicating stronger asset utilization. The other formulas don’t capture this efficiency: inverting the ratio would measure assets per revenue instead of revenue per asset; using inventory instead of PP&E points to inventory turnover, not capital asset turnover; and using net income over PPE mixes profitability with asset base rather than measuring how effectively assets generate sales.

Capital asset turnover measures how efficiently a company uses its capital assets to generate sales. It’s calculated as revenue divided by the capital asset base, typically the net PP&E (property, plant, and equipment minus depreciation). Using ending net PP&E gives the asset base at period end, which aligns with the period’s revenue to reflect how effectively those assets generated sales during the period. So the best representation is revenue divided by ending net PP&E.

A higher ratio means more revenue per dollar of capital assets, indicating stronger asset utilization. The other formulas don’t capture this efficiency: inverting the ratio would measure assets per revenue instead of revenue per asset; using inventory instead of PP&E points to inventory turnover, not capital asset turnover; and using net income over PPE mixes profitability with asset base rather than measuring how effectively assets generate sales.