Revenue divided by total assets — measures how efficiently a business converts its asset base into revenue, a key driver of return on assets.
Deeper Explanation
Asset turnover is a component of the DuPont decomposition of ROE: ROE = Profit Margin × Asset Turnover × Financial Leverage. High asset turnover businesses (retailers, distributors) compensate for thin margins with rapid capital cycling. Low asset turnover businesses (manufacturers, capital-intensive industrials) depend on high margins to generate adequate returns. The most attractive businesses combine high margins with high asset turnover — asset-light compounders like consumer brands and software — because they generate high returns on capital with minimal reinvestment requirements. Declining asset turnover while margins are stable signals that the business is becoming less capital-efficient.
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