Share turnover ratio gives you a sense of how easy, or difficult, it is to sell shares of a particular stock. In simplest terms, it compares the number of shares that change hands during a particular period with the total number of shares that could have been traded during that same period.
To compute a company's share turnover ratio, you need two numbers. The first is the trading volume, which is the total number of shares of the company's stock that were bought and sold during the time period in question. Financial information services keep track of the trading volume of a stock. The second number is the total number of outstanding shares, which are shares that have been issued to investors and are available for purchase. To get the average outstanding shares for a period of time, financial analysts simply take the numbers from the beginning of the period and the end, add them together, then divide by two.
To get share turnover, take the total trading volume for the period in question and divide it by the average number of outstanding shares. For example, assume a company has 135 million shares outstanding on the first day of its fiscal year, 143 million outstanding shares on the last day, and a total trading volume of 122 million shares for the year. First, determine the average outstanding shares: 135 million plus 143 million equals 278 million. Dividing the result by two gives you 139 million. Now divide 122 million by 139 million to get 0.878. Share turnover ratio is frequently expressed as a percentage. In this case, it would be 87.8 percent.
Using the Ratio
The primary value of the share turnover ratio is as an indicator of a stock's liquidity, which is how easy it is to sell shares. You can only sell stock if there's a market for it. The more active the market, the higher the trading volume and the higher the share turnover ratio will be.
The share turnover ratio only tells you how easily an investor can get rid of shares. It doesn't necessarily tell you anything about the performance of a company behind the stock. If a stock is tanking and no one wants to buy it, that will be reflected in low turnover. But if the stock is soaring to the point where a single share costs hundreds of dollars, that's going to limit the number of investors who are able to buy in. One reason companies split their stock is to try to make their shares seem more more affordable.
- "Financial Accounting for MBAs," Fourth Edition; Peter Easton et al; 2010