We penalise companies with a high and/or rising asset turnover relative to industry peers. Asset turnover measures the sales a company is able to generate from its asset base. The lower the ratio, the more efficient a company is perceived as being. The relationship between a company’s asset base and its revenues is more likely dictated by industry than domicile. For example, retailing companies tend to have high sales with low margins that result in low asset turnover of 40-60% (or 0.4-0.6x), as shown in 39. By comparison, capital intensive industries, such as property and infrastructure, have high ratios.
While we are concerned with how asset turnover stacks up relative to peers, it is important to understand why a company’s asset turnover is different from its peers. For example, a difference could simply arise because a company keep a lot of cash on its balance sheet. Furthermore, we are equally concerned with changes in asset turnover. A rising asset turnover ratio could suggest that the company is becoming increasingly efficient – or it could simply result from an asset revaluation.
Our accounting screen is set to trigger a red flag when asset turnover exceeds the 80th percentile (i.e. they are very high) relative to GICS industry peers, and/or when there is an abnormally large increase relative to the normal rate of change amongst industry peers over one and three years. This latter red flag is triggered when the increase in asset turnover exceeds the 80th percentile relative to the change experienced by industry peers between 2010 and 2015.
