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How asset turnover works

Asset turnover is sales divided by total assets. On $500,000 of sales and $800,000 of assets it is 0.625. Times a 9 percent net margin, that is the 5.625 percent ROA on the same sheet, and times the 2.67 multiplier it is 15 percent ROE.

DuPont ROE

15.00%

Margin 9.00%, turnover 0.625, multiplier 2.67.

Net margin
9.00%
Asset turnover
0.625
Equity multiplier
2.67
ROA
5.63%
ROE
15.00%
$

Profit after interest and tax.

$

Sales for the same period as net income.

$

Book assets. The equity multiplier is assets over equity.

$

Shareholders' equity, not market cap.

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Net profit margin

In short

  • Asset turnover is Sales/AssetsSales / Assets. On $500,000 over $800,000 that is 0.625.
  • Times 9 percent net margin: ROA 5.625 percent. Times the 2.67 equity multiplier: ROE 15 percent.
  • $400,000 of sales on the same $800,000 is 0.5 turnover, 15 percent margin, 7.5 percent ROA, 10 percent ROE.
  • $1,000,000 of sales on $500,000 of assets is turnover of 2, 8 percent margin, 16 percent ROA, 20 percent ROE.
  • DuPont analysis is the product. This page is the middle piece.

Sales over the stock of assets

Asset turnover asks how many dollars of sales each dollar of assets supported this period:

Asset turnover=SalesAssets\text{Asset turnover} = \frac{\text{Sales}}{\text{Assets}}

On $500,000 of sales and $800,000 of assets that is 0.625. It is a rate of turns, not a percent. 0.625 means each dollar of assets supported 62.5 cents of sales this year.

DuPont multiplies that 0.625 by a 9 percent net margin to get 5.625 percent ROA, then by the 2.67 equity multiplier to get 15 percent ROE. The DuPont calculator on this page is that product. This page owns the 0.625.

Slower turns, wider margin

Sales $400,000 on the same $800,000 of assets is turnover of 0.5. Net income $60,000 is a 15 percent margin. ROA 7.5 percent. ROE 10 percent on $600,000 of equity.

Turnover fell from 0.625 to 0.5. Margin rose. The product is a different ROE. Ranking on turnover alone ranks the first sheet higher. Ranking on margin ranks the second higher.

Fast turns on a thinner base

Sales $1,000,000 on $500,000 of assets is turnover of 2. Margin 8 percent on $80,000 of net income. ROA 16 percent. ROE 20 percent on $400,000 of equity.

Two dollars of sales per dollar of assets is a very different business from 0.625. A grocer and a utility can both print a 15 percent ROE with turnover figures that do not belong in one ranking.

Not inventory turnover

Inventory turnover is 365 over DIO, a stock of goods against cost of goods. Asset turnover is sales against the whole balance sheet. A firm can turn inventory fast and still turn total assets slowly if the rest of the sheet is plant.

The cash conversion cycle is the days version of the operating loop. This page is the sales-over-assets piece of DuPont.

Same period, book assets

Sales are a flow. Assets are a stock. Using year-end assets against a year of sales is the usual teaching convention. A year of sales against a quarter-end sheet, or market cap in the denominator, is a different ratio. Average assets over the year is a refinement this calculator does not make. Type the assets your sheet is using.

What this page is not doing

It is not inventory turnover, not a 365 day clock, and not a target of 0.625. The three sheets are 0.625 on $500,000 over $800,000 (ROA 5.625 percent, ROE 15 percent), 0.5 on $400,000 over $800,000 (ROA 7.5 percent, ROE 10 percent), and 2 on $1,000,000 over $500,000 (ROA 16 percent, ROE 20 percent). This is educational material, not financial advice.

Worked examples

0.625 on the first DuPont sheet

Sales $500,000, assets $800,000, net income $45,000, equity $300,000. What is asset turnover?

  1. Turnover: 500000/800000=0.625500000 / 800000 = 0.625.
  2. Margin 9 percent, multiplier 2.67, ROA 5.625 percent, ROE 15 percent.

Asset turnover is 0.625. Margin 9 percent, multiplier 2.67, ROA 5.625 percent, ROE 15 percent.

0.5 on the second sheet

Sales $400,000, assets $800,000, net income $60,000, equity $600,000. What is asset turnover?

  1. Turnover: 400000/800000=0.5400000 / 800000 = 0.5.
  2. Margin 15 percent, multiplier 1.33, ROA 7.5 percent, ROE 10 percent.

Asset turnover is 0.5. Margin 15 percent, multiplier 1.33, ROA 7.5 percent, ROE 10 percent.

Turnover of 2 on the third sheet

Sales $1,000,000, assets $500,000, net income $80,000, equity $400,000. What is asset turnover?

  1. Turnover: 1000000/500000=21000000 / 500000 = 2.
  2. Margin 8 percent, multiplier 1.25, ROA 16 percent, ROE 20 percent.

Asset turnover is 2. Margin 8 percent, multiplier 1.25, ROA 16 percent, ROE 20 percent.

Common questions

Is 0.625 a percent?

No. It is dollars of sales per dollar of assets. 0.625 means 62.5 cents of sales per dollar of assets this year.

Why is this not inventory turnover?

Inventory turnover is 365 over days inventory, a stock of goods. Asset turnover is sales over the whole sheet.

Is a higher turnover better?

It is more sales per dollar of assets. It can also be a thin plant that cannot grow. Compare inside a sector. This is educational material, not financial advice.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.