The asset turnover ratio measures how efficiently a company uses its assets to generate revenue. It is one of the three pillars of the DuPont decomposition of ROE: ROE = Net Margin × Asset Turnover × Leverage.
Formula: Asset Turnover = Revenue / Average Total Assets. "Average" uses opening and closing balance sheets to smooth one-year capex spikes.
A higher asset turnover means more revenue squeezed out of each rupee of assets. Asset-light businesses (services, software, brokers) commonly run 1.0-2.0+. Asset-heavy businesses (utilities, steel, real estate) often run 0.2-0.5.
The interesting question is trend within the same business: rising asset turnover indicates pricing power, demand strength, or capacity optimisation. Falling asset turnover indicates capacity overbuild, slowing demand, or capex outpacing growth.
Example 1: An IT services company has asset turnover of 1.2 (revenue Rs 1.2 lakh cr on Rs 1 lakh cr assets). Combined with 20% net margin and minimal leverage, ROE comes to ~24% — textbook asset-light economics.
Example 2: A cement maker has asset turnover of 0.5 (Rs 25,000 cr revenue on Rs 50,000 cr assets). With 12% net margin and 0.6x debt/equity, ROE comes to ~10%. To improve ROE, management must either lift utilisation (turnover) or expand margins; growing assets via greenfield alone dilutes the metric.
Cross-sector comparison is misleading. A consumer retailer at 3x asset turnover isn't "better" than a utility at 0.3x — they are different business models.
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