Asset Turnover/ROCE

NickyW

Hi there
Can anyone tell me what the difference between these 2 ratios are? If you have a low Asset Turnover will it automatically follow that you have a low ROCE?
Thanks
Nicky

Bookworm55

Asset Turnover is Sales divided by Capital Employed (or operating assets)
Return on Capital Employed is Profits divided by Capital Employed

If you're feeling flash, you could borrow from the DuPont pyramid of ratios and remember that:

ROI = Margin x Asset Turnover = profit / capital employed

ROI = profit / operating assets
margin = profit / sales
asset turnover = sales / operating assets

So when you multiply margin by asset turnover, you get return on investment because the 'sales' figures on the top and bottom of the fraction cancel each other out.

ROI = (profit x sales) / (sales x operating assets)

So yes, low asset turnover would also suggest low ROCE. However, if two companies or departments have the same asset turnover but one has a higher ROCE, then it must have a higher profit margin.

SandyHood

Following on from bookworm's excellent response

A high margin business e.g. individually made wedding dresses may have a low asset turnover as sales are not very high, but the very high margin per wedding dress could mean they have a high ROCE

NickyW

Thank you for both your replies - that really helps as always!!