![]() There are a variety of strategies and tactics employed, but there are a few common denominators. I once mentioned I have put together notes on investors who have achieved exceptional (20-30% annual returns or better) over a long period of time (say 10-15 years minimum). The higher the turnover, the higher the returns. So in business, it is clear that asset turnover (and inventory turnover) is a good thing. Two competitors with identically low profit margins might have vastly different profitability because one grocer might be producing much higher ROA due to its ability to turn its inventory over faster. A grocery store is a very low margin business, but in some cases grocers can produce adequate (or sometimes better than adequate) returns on capital if they are able to turn their inventory (merchandise on the shelves) faster than competitors. These examples aren’t to say one business or one measurement is better than the other– it’s really just to point out the importance of turnover. Meanwhile, Whole Foods’ profit margin is less than 1/4th the size of Coke’s, but it turns over its asset base nearly 5 times faster, yielding roughly the same return on the resources it has to deploy. We can compare two businesses in different industries to see how their business models and operating results affect their profitability:Ĭoke and Whole Foods produce roughly the same ROA, but got there in very different ways… Coke has very high profit margins but takes nearly 2 years to produce $1 of revenue for every $1 of assets. This allows NVR to be almost three times more efficient with its resources than Lennar, and although Lennar has a higher profit margin, NVR produced a much better return on assets. NVR has a different business model than Lennar as it uses less capital (it employs a smaller asset base). Just look at how Coke’s profit margins are almost double the margins at Pepsi, but Pepsi is about equally profitable (produces similar returns on assets) because Pepsi is more efficient than Coke is at using the assets it has. If two companies have the same asset base, the company with the higher level of sales is doing a better job at employing those assets.Ĭoke and Pepsi are somewhat similar businesses, but it isn’t necessary to compare their business models when it comes to understanding the math of turnover. Generally speaking, asset turnover is a good thing-the higher the better. It’s simply a company’s revenue in a given period divided by its assets. To think about portfolio turnover, let’s first take a look at a concept that security analysts and value investors think about more often: asset turnover.Īsset turnover basically measures how efficient a company is at using the resources it has to generate revenue. This leads me to a thought that I think, for some reason, is not really discussed in investing circles-at least not in value investing circles: and that is the concept of portfolio “turnover”. I just checked a screener and there are 375 stocks in the US that are 50% higher than they were 1 year ago today. The market is constantly serving up opportunities. ![]() ![]() I think the market generally does a good job at valuing companies within a range of reasonableness, but there is absolutely no way that the intrinsic values of these multibillion dollar organizations fluctuate by 50%, 80%, 120%, 150% or more during the span of just 52 weeks. I mentioned that this simple observation (the huge gap between yearly highs and lows) is all the evidence you need to debunk the theory that markets are efficiently priced all the time. A while back I wrote a post about how the gap between 52 week high and low prices presents an opportunity for investors in public markets.
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