Turnover

Turnover

Turnover measures how quickly a company replaces or cycles through assets, obligations, or holdings over a given period. It is used in accounting and investing to assess operational efficiency, liquidity, and portfolio activity.

Key takeaways

• Turnover gauges the speed of business activity—selling inventory, collecting receivables, paying suppliers, replacing assets, or trading securities.
• Common measures: accounts receivable turnover, inventory turnover, asset turnover, portfolio turnover, and working capital turnover.
• High or low turnover is meaningful only relative to industry norms and company strategy.

Why turnover matters

Turnover ratios help investors and managers evaluate how efficiently a company uses resources and converts assets into sales or cash. Strong turnover can indicate effective operations (fast sales, quick collections), while weak turnover can signal collection problems, excess inventory, or underused assets. In investing, portfolio turnover affects trading costs and tax efficiency.

Accounts receivable turnover

Definition: How quickly a business collects payments from credit sales.

Formula:
Accounts receivable turnover = Credit sales / Average accounts receivable

Example: If credit sales are $300,000 and average accounts receivable is $50,000, the turnover is 6 — meaning receivables are collected six times in the period.

Note: Low AR turnover suggests slower collections or lenient credit policies. A related metric, accounts payable turnover, measures how quickly a company pays suppliers (commonly calculated as Purchases / Average accounts payable).

Inventory turnover

Definition: How often a company sells and replaces its inventory.

Formula:
Inventory turnover = Cost of goods sold (COGS) / Average inventory

Example: COGS of $400,000 with average inventory of $100,000 yields an inventory turnover of 4, meaning the inventory was turned over four times in the period.

Related metric: Days’ Sales of Inventory (DSI) = (Number of days in period) / Inventory turnover, which estimates how many days inventory sits on hand.

Portfolio turnover

Definition: The percentage of an investment portfolio that is bought and sold over a period.

Formula (simple):
Portfolio turnover = Value of securities sold (or traded) / Average assets under management

Example: A mutual fund with $100 million AUM that sells $20 million of securities in a year has a 20% turnover rate.

Notes: Active funds generally show higher turnover (and higher trading costs) than passive funds. Very high turnover can reduce net returns through transaction costs and taxes.

Asset turnover

Definition: How effectively a company generates sales from its asset base.

Formula:
Asset turnover = Total sales / Average total assets
(where Average total assets = (Beginning assets + Ending assets) / 2)

Use this ratio to compare companies within the same industry; capital-intensive firms typically show lower asset turnover than asset-light businesses.

Other turnover measures

• Working capital turnover — sales divided by average working capital (current assets minus current liabilities), used to evaluate how efficiently working capital supports sales.
• Employee turnover — rate at which staff leave and are replaced; high employee turnover often signals morale or retention issues and increases hiring costs.

Simple explanation

Turnover is how fast something is replaced. For example, inventory turnover is how often a store sells and restocks its goods; employee turnover is how quickly staff leave and need replacing.

Frequently asked questions

Q: Is turnover the same as profit?
A: No. Turnover measures speed (how fast assets move or are replaced). Profit is revenues minus expenses and reflects net earnings.

Q: Is higher turnover always better?
A: Not necessarily. High turnover can indicate efficiency, but it may also reflect underinvestment, stockouts, or excessive trading costs (in portfolios). Interpret turnover relative to industry norms and business strategy.

Q: How can a company improve turnover ratios?
A: Common approaches include tightening credit policies (improving AR turnover), better inventory management (just-in-time, demand forecasting), optimizing asset use, and reducing unnecessary portfolio trading.

Conclusion

Turnover covers several important ratios that reveal how quickly a business or portfolio cycles resources. Accounts receivable and inventory turnover are the most commonly used in operating businesses; asset and portfolio turnover provide broader views on asset efficiency and investment activity. Interpreting these ratios requires comparison to industry peers and an understanding of the company’s business model and strategy.