Chartered Financial Analyst (CFA) Level 1 Practice Exam

Which activity ratio is most relevant for assessing asset utilization?

1. Total Assets Turnover

2. Days Sales Outstanding

3. Fixed Assets Turnover

4. Working Capital Turnover

The correct answer is: Total Assets Turnover

The total assets turnover ratio is a key measure for assessing asset utilization because it evaluates how effectively a company is using all of its assets to generate sales. This ratio is calculated by dividing total sales or revenue by total assets, indicating how efficiently a business is leveraging its asset base to produce sales. A higher total assets turnover ratio suggests that the company is utilizing its assets more effectively in generating revenue. While other ratios listed also pertain to asset utilization, they focus on specific asset categories rather than the overall asset base. Days Sales Outstanding, for example, measures how quickly a company collects cash from credit sales, which is an aspect of efficiency but does not directly assess overall asset utilization. Fixed Assets Turnover specifically looks at how well the company uses its fixed assets to generate sales, and Working Capital Turnover assesses how effectively a company is using its working capital. Though these ratios are relevant to operational efficiency, they do not provide as comprehensive a view of overall asset utilization as the total assets turnover ratio does.