Companies with a low total asset turnover ratio require a large amount of physical resources to generate each dollar of sales. This means they are not very profitable per dollar invested. They tend to have fewer competitors than companies in industries with easier and cheaper entry and can mark up their products to restore their profitability. Companies with a high total asset turnover ratio are those that require few physical assets for each sales dollar. Entry to these industries is easy and competition usually intense leading to low profit margins. Since return on assets is the product of these two ratios, market forces tend to keep them in balance, so all firms can produce a reasonable rate of return regardless of their needed commitment to assets.
This site uses Akismet to reduce spam. Learn how your comment data is processed.