Operating Efficiency Ratios

CFA Level 1 - Financial Ratios

OPERATING EFFICIENCY RATIOS

1. Total Asset Turnover

This ratio measures a company's ability to generate sales given its investment in total assets. A ratio of 3 will mean that for every dollar invested in total assets, the company will generate 3 dollars in revenues. Capital-intensive businesses will have a lower total asset turnover than non-capital-intensive businesses.

                                                                                        Formula 7.25

Total asset turnover = net sales / average total assets

2. Fixed-Asset Turnover

This ratio is similar to total asset turnover; the difference is that only fixed assets are taken into account.
                                                                                 Formula 7.26

Fixed-asset turnover = net sales / average net fixed assets

3.Equity Turnover

This ratio measures a company's ability to generate sales given its investment in total equity (common shareholders and preferred stockholders). A ratio of 3 will mean that for every dollar invested in total equity, the company will generate 3 dollars in revenues.

                                                                                           Formula 7.27

Equity turnover = net sales / average total equity

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