Asset Turnover

Asset turnover measures efficiency. A company that produces a lot of revenue from relatively few assets has high asset turnover; one that needs large amounts of assets to generate sales has low turnover.

For example, a company with revenue of 2 million and total assets of 1.5 million has an asset turnover of about 1.33. Each unit of assets produces about 1.33 units of sales in a year. Analysts often use average assets over the year.

Asset turnover varies greatly between industries. Supermarkets and retailers often have high turnover, selling large volumes of goods relative to their stores and inventory. Utilities, telecoms companies and property businesses usually have low turnover, because they need huge investments in infrastructure.

Asset turnover is one of the three parts of DuPont analysis, which breaks return on equity into profit margin, asset turnover and financial leverage. It shows that companies can achieve good returns in different ways: some through high margins and low turnover, such as luxury brands, and others through low margins and high turnover, such as discount retailers.

A falling asset turnover may indicate unused capacity, slow-moving inventory or recent investments that have not yet produced sales.