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  • The Daily Technical #114: Define free cash flow yield and compare it to dividend yield and P/E ratios.

The Daily Technical #114: Define free cash flow yield and compare it to dividend yield and P/E ratios.

How to answer "What does the asset turnover ratio measure?"

February 17, 2025

Good morning. Welcome to the 114th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What does the asset turnover ratio measure?

The asset turnover ratio measures a company's ability to use assets effectively to generate sales.

It calculates how much revenue is earned for each dollar invested in assets.

A higher ratio indicates efficient asset use, implying more revenue per asset dollar.

However, be mindful of potential distortions from capital expenditures and asset sales.

Formula: Revenue / (Average of Beginning and Ending Total Assets)

Common Mistakes

  1. Neglecting industry context. A higher ratio indicates better efficiency, yet varying industry standards must be considered to avoid misleading conclusions. Different industries have distinct asset structures, so always analyze the ratio relative to common practices in the specific sector for meaningful insights.

  2. Ignoring the limitations of the ratio can lead to an incomplete analysis. Always mention that capital expenditures and asset sales can distort the ratio, affecting its reliability as a standalone metric.

TL;DR

  • Asset turnover ratio gauges asset efficiency in generating sales.

  • Formula: Revenue / Average (Beginning & Ending Total Assets).

  • Higher ratio = more revenue per asset dollar, indicating efficiency.

  • Watch for distortions from capital expenditures and asset sales.

  • Evaluate context to assess ratio accurately.

TODAY’S QUESTION
Define free cash flow yield and compare it to dividend yield and P/E ratios.

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