The equity turnover of a firm equals:
Click on the arrows to vote for the correct answer
A. B. C. D.B
Equity Turnover = sales/equity = (sales/total assets)*(total assets/equity)= (asset turnover)*(financial leverage)
The equity turnover of a firm is a financial ratio that measures the efficiency with which the firm utilizes its equity to generate sales. It provides an indication of how effectively the company is employing its equity capital to generate revenue.
The correct answer to the question is:
D. sales to equity ratio.
Explanation:
The equity turnover ratio is calculated by dividing the firm's net sales (revenue) by its average equity. It shows the amount of sales generated for each unit of equity invested in the company.
Mathematically, the formula for equity turnover ratio is:
Equity Turnover = Net Sales / Average Equity
Now, let's analyze the other answer choices to understand why they are incorrect:
A. asset turnover times financial leverage.
Asset turnover measures the efficiency of a firm in utilizing its assets to generate sales. Financial leverage, on the other hand, refers to the use of debt financing in a firm's capital structure. Multiplying asset turnover by financial leverage does not result in the equity turnover ratio. Therefore, option A is incorrect.
B. asset turnover times financial leverage and sales to equity ratio.
Similar to option A, multiplying asset turnover by financial leverage does not give us the equity turnover ratio. Additionally, including the sales to equity ratio in the calculation is not appropriate, as the sales to equity ratio represents the firm's net sales divided by its equity, rather than being part of the equity turnover ratio calculation. Therefore, option B is incorrect.
C. net income to equity ratio.
The net income to equity ratio, also known as return on equity (ROE), measures the profitability of a firm in relation to its equity. It does not directly measure the relationship between sales and equity. Therefore, option C is incorrect.
In conclusion, the correct answer is D. sales to equity ratio, which is calculated by dividing net sales by average equity.