What Is Turnover Ratio?
Turnover ratio is a broad term for several financial ratios that measure how efficiently a company or fund uses its assets, inventory, or capital within a given period. In the Indian stock market context, the three most important turnover ratios are:
- Asset Turnover Ratio — Revenue vs. total assets
- Inventory Turnover Ratio — Cost of goods sold vs. inventory
- Portfolio Turnover Ratio — For mutual funds, how frequently the fund's holdings are replaced
1. Asset Turnover Ratio
Formula:
Asset Turnover = Net Revenue ÷ Average Total Assets
Interpretation: Measures how much revenue a company generates for every rupee of assets it owns. A higher ratio indicates better asset efficiency.
Example: Tata Consultancy Services (TCS)
- Revenue: ₹2,40,000 crore
- Total Assets: ₹1,20,000 crore
- Asset Turnover = ₹2,40,000 ÷ ₹1,20,000 = 2.0x
This means TCS generates ₹2 of revenue for every ₹1 of assets — highly efficient for a services company.
Sector Benchmarks for Asset Turnover
| Sector | Typical Asset Turnover |
|---|---|
| Retail / FMCG | 1.5–3.0x |
| IT Services | 1.5–2.5x |
| Manufacturing | 0.8–1.5x |
| Banking / NBFC | 0.05–0.15x (assets = loans, not comparable) |
| Capital Goods | 0.6–1.2x |
Note: Banks have very low asset turnover because their "assets" are loans — comparison should be within the same sector.
2. Inventory Turnover Ratio
Formula:
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
Interpretation: How many times per year a company sells and replenishes its inventory. Higher = more efficient inventory management.
Example: A pharma company with COGS of ₹500 crore and average inventory of ₹100 crore:
Inventory Turnover = 500 ÷ 100 = 5x per year (inventory sold every ~73 days)
- Too high (e.g., 20x+): Risk of stockouts; may signal insufficient safety stock
- Too low (e.g., 1–2x): Excess inventory; capital tied up inefficiently; potential obsolescence risk
3. Receivables Turnover Ratio
Formula:
Receivables Turnover = Net Revenue ÷ Average Accounts Receivable
Days Sales Outstanding (DSO) = 365 ÷ Receivables Turnover
Lower DSO = company collects cash quickly from customers. High DSO (>90 days) can indicate customer credit risk or aggressive revenue recognition.
4. Portfolio Turnover Ratio (Mutual Funds)
For mutual funds, portfolio turnover ratio measures how frequently the fund manager replaces holdings:
Portfolio Turnover = Min(Purchases, Sales) ÷ Average AUM
| Turnover | Meaning |
|---|---|
| < 25% | Buy-and-hold style; low transaction costs |
| 25–75% | Moderate trading |
| > 100% | High-frequency rebalancing; higher costs |
Why it matters for mutual fund investors:
- Higher turnover → Higher transaction costs within the fund → Lower net returns
- High turnover funds also generate more capital gain distributions (tax-inefficient)
- Index funds typically have <5% portfolio turnover; actively managed funds average 50–100%+
FAQ
Q: What is a good asset turnover ratio for an Indian manufacturing company? A: For heavy manufacturing (steel, cement, capital goods), 0.8–1.2x is typical. For consumer goods or FMCG, 1.5–2.5x is expected. Always compare within the same sub-sector.
Q: How does inventory turnover affect a company's cash flow? A: High inventory turnover generally means faster cash conversion — the company turns its investment in inventory into cash more quickly, improving working capital efficiency and reducing the cash conversion cycle.
Q: Is a high portfolio turnover ratio bad for a mutual fund? A: Not always — some high-turnover funds consistently outperform. But statistically, funds with lower expense ratios and lower turnover tend to deliver better long-term after-cost returns. SEBI requires all funds to disclose portfolio turnover in their factsheets.