What does a higher asset turnover ratio indicate?

• A. Lower efficiency in using assets to generate revenue.
• B. Higher liquidity.
• C. Greater efficiency in asset utilization to generate revenue.
• D. Lower profitability.

Answer: (C)

Asset turnover shows how efficiently a company uses its assets to generate sales. When this ratio is higher, more revenue is produced per dollar of assets, signaling greater efficiency in asset utilization to generate revenue. It isn’t a measure of liquidity—the ability to meet short-term obligations—so a higher turnover doesn’t automatically mean better liquidity. Nor does it guarantee higher profitability, since profits depend on margins and expenses in addition to how efficiently assets are used. A lower asset turnover, by contrast, suggests assets aren’t being used as effectively to drive sales.