What does the asset turnover ratio measure?

The asset turnover ratio measures how efficiently a company generates sales from its total assets. This ratio is calculated by dividing total sales or revenue by total assets, providing insight into how well a firm utilizes its assets to produce revenue. A higher asset turnover ratio indicates that a company is using its assets more efficiently to create sales, which is a positive sign of operational efficacy.

In contrast, liquidity refers to how easily a company can meet its short-term obligations, which is not the focus of the asset turnover ratio. Net profitability measures the overall profitability of the company relative to its assets, but it doesn't specifically address how efficiently those assets are converted into sales. Long-term asset valuation concerns the worth of non-current assets and does not directly relate to sales generation efficiency. Thus, the asset turnover ratio is distinctly tied to assessing operational performance through sales generation relative to asset utilization.