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Asset turnover to ROE

Accounting
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What is the effect of increase in Asset turnover to ROE, Assuming other numbers remain the same?

Apr 25th, 2014

Turnover in business can be defined in two ways. Inventory turnover refers to how frequently a company sells and restocks its inventory. Employee turnover refers to the rate at which employees leave a company and are replaced. Return on equity (ROE) is a financial ratio used to compare a company's total owners' equity with its net income. ROE is calculated as net income divided by owners' equity. Both inventory turnover and employee turnover can have slight effects on a company's ROE, making both types of turnover of interest to potential lenders and investors as well as business owners.

Increasing inventory turnover translates into higher sales numbers, which can result in higher total revenues. Assuming costs remain the same or decrease, higher revenues ultimately increase net income, which raises ROE. A higher ROE number is always more desirable than a lower value.

Increasing employee turnover in sales or marketing departments can have the effect of temporarily reducing company revenues, subsequently reducing net income and negatively affecting ROE. If a high-performing sales team leader leaves his job, for example, he is likely to be replaced by someone who will take some time before reaching the performance level of his predecessor, which can bring in less sales and less revenue. The same can be true of your most creative and innovative advertising designers, sponsorship solicitors or other marketing employees whom you rely on to push sales revenue higher.


Apr 25th, 2014

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