Asset Turnover

Margin gets all the attention. Turnover is where the real leverage hides.

The formula

Asset Turnover = Revenue ÷ Total assets

The result is a multiple: how many times you cycle your asset base through the business each year. A turnover of 2x means you generate £2 of revenue for every £1 of assets. A turnover of 0.5x means you need £2 of assets to generate £1 of revenue.

Variants focus on specific assets — inventory turnover (COGS ÷ inventory), receivables turnover (revenue ÷ receivables), or working capital turnover. The principle is the same: how fast does capital move through the system?

Why it matters: the DuPont decomposition

Return on assets breaks into two components:

ROA = Profit margin × Asset turnover

A 10% ROA can come from 10% margins and 1x turnover, or 2% margins and 5x turnover. The financial outcome is identical. The businesses are completely different.

This is the insight most analysis misses. Margin dominates the conversation — “they only make 2% margins” sounds bad. But 2% margins at 5x turnover generates the same return as 20% margins at 0.5x turnover. Costco and Hermès both create value; they do it through opposite models.

The DuPont formula reveals that improving turnover is mathematically equivalent to improving margin. Doubling turnover doubles ROA, just as doubling margin does. Yet margin improvement gets board attention while turnover improvement is “just operations.”

The strategic insight

George Stalk’s thesis in Competing Against Time is that speed is a source of competitive advantage, not just operational efficiency.

Faster cycles mean faster learning. A business that completes ten product iterations while a competitor completes two learns five times as fast. The speed advantage compounds.

Faster cycles mean faster cash recovery. Capital tied up in inventory or receivables isn’t available for other uses. A business with 30-day cycles recovers cash twelve times a year. One with 90-day cycles recovers four times. Same capital base, three times the throughput.

Faster cycles are harder to copy. Competitors can match your price or copy your product. Matching your speed requires rebuilding operations, culture, and systems. The moat is structural.

Danaher built an empire on this insight. The Danaher Business System is fundamentally about cycle time compression — faster product development, faster manufacturing, faster everything. The operational improvements translate directly to financial returns through the turnover multiplier.

What it hides

Asset turnover can mislead in several ways:

Asset-light isn’t always better. A business can show high turnover by leasing assets instead of owning them, or by outsourcing capital-intensive functions. The assets still exist; they’re just off balance sheet. Operating leases, contract manufacturing, and third-party logistics can all inflate turnover without changing the underlying economics.

Growth distorts the ratio. A company investing in capacity shows assets growing ahead of revenue. Turnover drops even though the investment is rational. Conversely, a company harvesting assets shows rising turnover while potentially damaging future capacity.

Accounting differences matter. Depreciation policies, capitalisation thresholds, and impairment decisions all affect the asset base. Two operationally identical businesses can show different turnover simply because of accounting choices.

Quality of revenue varies. High turnover driven by aggressive discounting or unsustainable promotions looks good until it doesn’t. The ratio doesn’t distinguish between healthy velocity and desperate volume-chasing.

Where it breaks down

Industry incomparability. Asset intensity varies structurally by sector. Software companies might show 2x+ turnover; utilities might show 0.3x. Comparing across industries is meaningless. Compare asset turnover within sector and against the company’s own history.

Seasonality effects. Period-end asset balances can mislead for seasonal businesses. A retailer’s turnover calculated on December inventory (peak) looks very different from the same calculation on June inventory (trough). Average balances help but require consistent data.

Acquisition distortion. Acquired goodwill and intangibles inflate the asset base without generating proportional revenue. A serial acquirer’s turnover will decline over time even if underlying operations are improving. Tangible asset turnover can be more meaningful.

Working capital manipulation. Companies can temporarily boost turnover by drawing down inventory, accelerating collections, or stretching payables. The improvement is real but not sustainable. Multi-year trends are more reliable than point-in-time snapshots.

Cycle time: the operational manifestation

Asset turnover is the financial outcome. Cycle time is the operational cause.

Inventory days = Inventory ÷ (COGS ÷ 365). How long stock sits before it sells.

Receivables days = Receivables ÷ (Revenue ÷ 365). How long customers take to pay.

Payables days = Payables ÷ (COGS ÷ 365). How long you take to pay suppliers.

Cash conversion cycle = Inventory days + Receivables days − Payables days. The total time from paying suppliers to collecting from customers.

A business with a 60-day cash conversion cycle ties up two months of working capital in operations. One with a 20-day cycle ties up less than one month. The difference flows directly to asset turnover and capital requirements.

Amazon’s negative cash conversion cycle — collecting from customers before paying suppliers — is a structural advantage that compounds with scale. They fund growth with supplier capital.

The decision it enables

Asset turnover tells you whether capital is working hard or sitting idle.

Rising turnover means the business is extracting more revenue from its asset base. Either revenue is growing faster than assets, or assets are being deployed more efficiently. Both are good.

Falling turnover means assets are accumulating faster than revenue. This might be investment for future growth (acceptable if temporary) or declining productivity (concerning if persistent).

For operators, turnover creates accountability for capital. Every asset should generate revenue. If turnover is declining, either the assets aren’t necessary or the revenue model isn’t working.

The deepest insight from Stalk is that time is a strategic variable, not just an operational one. Companies that compete on speed — faster development, faster delivery, faster cycles — build advantages that compound over time. Asset turnover is how that advantage shows up in the financials.

The metric series: Part of a series on metrics that reveal what headline numbers hide.