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4. Analyzing Company Fundamentals > Calculate Turnover Ratios

Calculate Turnover Ratios

Use turnover ratios to see if a company’s management is using its assets effectively to generate profits.

Every company management team aims to deploy its assets to generate the most profits possible. It doesn’t do any good for a company to own assets, such as factories, inventory, or even cash, if they’re not being used to maximum advantage. There are three ratios that investors typically evaluate to measure the efficiency of company management: asset turnover ratio, inventory turnover ratio, and receivable turnover ratio.

Asset Turnover Ratio

The first ratio to consider is the asset turnover ratio, which assesses the sales that a company can generate for each dollar of assets it owns—the higher the asset turnover ratio, the better. Companies with high asset turnover ratios can thrive even with low profit margins.


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