Asset turnover

What it means

Asset turnover is sales divided by total assets. It shows how many euros of sales each euro of the company's assets generates in a year. If a company with assets of 1 million euros achieves sales of 2 million euros, asset turnover is 2, meaning the assets turn over twice a year.

A low value suggests that assets are underused or that part of them generates no sales, such as excess inventory, uncollected receivables or idle machinery. A high value means assets are used efficiently, but it can also signal underinvestment.

The ratio is part of the DuPont analysis, which breaks return on equity down into profit margin, asset turnover and financial leverage. Together with return on sales it gives return on assets: profit per euro of sales multiplied by the number of turns.

How it works in practice

Asset turnover varies greatly by industry. Retail and services with few assets have high turnover, while heavy industry, energy or property rental have low turnover. The ratio is therefore compared with companies in the same industry and with the company's own trend over time, not with a universal benchmark.

Reducing tied-up assets improves turnover: selling unneeded machinery, better inventory management, faster collection of receivables or leasing instead of buying. More detail comes from component ratios such as inventory turnover and days sales outstanding.

In financial analysis, turnover is usually calculated from average assets over the year rather than year-end balances. If a company buys a large asset near year end, a ratio based on the closing balance would needlessly distort the picture of efficiency.

What to watch out for

The ratio is affected by accounting methods. A company with old, almost fully depreciated assets has low asset values and high turnover even if its machinery is outdated. When comparing companies, consider the age of assets and how they are financed, for example through leasing.

High turnover on its own does not mean success. A company that sells a lot at a low margin may have weak profitability. Turnover must therefore always be assessed together with profitability, cash flow and indebtedness.