Asset turnover

Asset turnover measures how effectively a business is using assets to generate sales. It is:

sales ÷assets

There are a few variations on this, depending on what measure of assets is used. The most obvious is total assets, i.e., fixed assets + current assets. This measures how many pounds in sales is generated for each pound invested in assets.

From an investor's point of view, it can be argued that current liabilities should be deducted from the amount of assets used. Investors are concerned with returns on their investment, Therefore the funding of current assets from current liabilities can be ignored.

Taking this further; what investors care about is the sales generated by their investment, i.e. equity + debt. This leaves us using the same denominator as ROCE. Using this definition thereby gives us a nice decomposition:

ROCE = EBIT margin ×asset turnover

This appears to be the most widely used definition of asset turnover.

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