When you are evaluating a business, how would you use the asset utilization ratio, and what do you look for?

The asset utilization ratio measures management's ability to make the best use of its assets to generate revenue. This is particularly meaningful in a manufacturing, where fewer capital assets are used to produce products. The more effectively that the equipment is used, the more profitable the company will be. Rather than acquiring additional equipment and incurring additional production costs, make better use of existing capacity.

The asset utilization ratio is calculated by dividing total sales by the net book value of the capital assets. Once calculated, this ratio can then be compared to benchmark industry standard ratios, or it can be compared to ratios of other comparable businesses.

Like all ratios, this is just an indicator. A high ratio may mean more efficient management, but it may also indicate older equipment that has been significantly depreciated.