Which of the following management actions would increase a Company’s Asset Turnover?

Question

BlackTom AI · Accepted Answer

To determine which management action would increase a company’s asset turnover, we first recall that asset turnover is calculated as sales (or revenue) divided by average total assets. Higher sales relative to assets, or lower assets relative to sales, raises the ratio.
Option 1: 'Shift toward more online sales requiring fewer stores' This tends to boost asset turnover because online sales can generate similar or higher revenue with fewer physical assets (less inventory, fewer stores, lower fixed assets). Reducing asset base while maintaining or increasing sales directly improves the ratio.
Option 2: 'Increasing operating costs' Raising operating costs does not directly change the denominator (assets) or the numerator (sales) in the asset turnover calculation in a way that would increase the ratio. In fact, higher costs can erode margins and could indirectly discourage sales growth, offering little to no boost to asset turnover.
Option 3: 'Selling shares of common stock' Issuing equity increases cash or other assets but also alters the capital structure rather than operational efficiency. Asset turnover focuses on how efficiently assets generate sales; unless the cash raised is immediately deployed to proportionally increase sales, this action does not inherently raise asset turnover and can even distort the metric temporarily.
Option 4: 'Increasing COGS' Higher cost of goods sold reduces gross profit but, again, does not inherently raise sales or reduce assets. Since asset turnover uses sales over assets, simply increasing COGS without a corresponding rise in sales or a reduction in assets will not increase the ratio and may indirectly depress it if it hurts sales or profits.
In summary, only the move toward online sales with fewer stores reduces asset intensity while maintaining or growing revenue, which raises the asset turnover ratio. The other actions either leave the asset base unchanged or increase assets or reduce sales efficiency, thereby not contributing to a higher asset turnover.

Which of the following management actions would increase a Company’s Asset Turnover?

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