A company’s investment turnover ratio measures its ability to generate sales revenue using the money it has invested in the company. The ratio equals sales divided by the sum of long-term liabilities plus stockholders’ equity. Stockholders’ equity is the amount of money stockholders have invested in a company. The amount of long-term liabilities is the amount of money debtholders have invested in the company. You can calculate investment turnover ratio using information from a company’s annual report. A higher ratio means a company is using its invested money more efficiently, which increases value for stockholders.
Find a company’s income statement and balance sheet in its 10-K annual report. You can obtain this report from the investor relations section of a company’s website or from the U.S. Securities and Exchange Commission’s EDGAR online database.
Find the amount of a company’s sales at the top of its income statement. This is the money it earned from selling its products and services to customers before paying any expenses. For example, assume the company’s income statement shows $500,000 in sales.
Find the amounts of the company’s total long-term liabilities and total stockholders’ equity on its balance sheet. In this example, assume the company has $100,000 in total long-term liabilities and $150,000 in total stockholders’ equity.
Add together total long-term liabilities and total stockholders’ equity. In the example, add $100,000 and $150,000 to get $250,000.
Divide sales by your result to calculate the investment turnover ratio. Continuing the example, divide $500,000 by $250,000 to get an investment turnover ratio of 2. This means the company generated sales equal to twice its total long-term liabilities and stockholders’ equity.
Track a company’s investment turnover ratio over time, and compare it with those of other companies in its industry. A company that increases its investment turnover ratio over time and maintains a ratio above those of its competitors may outperform other companies.
- “Business Ratios and Formulas: A Comprehensive Guide -- Second Edition”; Steven M. Bragg; 2007
- AccountingCoach; Multiple-Step Income Statement; Harold Averkamp
- AccountingCoach; Sample Balance Sheet; Harold Averkamp