CFA Practice Question

CFA Practice Question

Which of the following ratios would NOT be used to evaluate how efficiently management is utilizing a firm's assets?
A. Total asset turnover
B. Inventory turnover
C. Equity turnover
Explanation: Equity turnover is a ratio used to determine the efficiency of using stockholders' equity to generate revenue. The higher the ratio, the more effective the company is at using stockholders' capital.

Equity Turnover = Annual Sales / Average Stockholder's Equity

User Contributed Comments 5

User Comment
danlan Good point
kfly Equity Turnover = Net Sales/Average Equity --> This can be artificially inflated by assuming more debt financing so not the best indicator.
steved333 Equity turnover is asset turnover times the equity multiplier as in the DuPont model: (sales/assets)*(assets/equity)
sambra Inventory tunover is also a measure of Asset utilisation ( higher ending inventories) impact the ratio.
mlaci Inventory turnover is a wrong answer:

Equity is NOT an asset of the company, it is a LIABILITY of the company to owners (not to debtors). So it can not be used for asset assessment purposes. (You can use equity, capital increase, to repay loan, for example, without any effect on assets).

However inventory IS an asset (a liquid one, but asset anyway), so inventory turnover can be used for BOTH asset utilization AND liquidity assessment purposes.

The correct answer is equity turnover, because the question did not ask that whether inventory turnover can be used for any other purposes or not.
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