Financial Statement Analysis
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Equity Turnover Ratio – Equity Turnover ratio is the proportion of Company’s revenue to its shareholder’s equity. Have a look at the above Equity Turnover chart of Google and Amazon. We note that while Amazon is operating at an equity turnover of 8.87x, Google’s equity turnover is a mere 0.696. What does this mean for Amazon and Google? Is Amazon utilizing its equity better than Google?
The answer lies in understanding Equity Turnvoers in detail. In this article, we will look at equity turnover ratio in detail
- What is Equity Turnover Ratio?
- Equity Turnover Formula
- Interpretation of Equity Turnover Ratio
- Equity Turnover Ratio Example
- Nestle Equity Turnover Ratio Calculation
- IOC – Equity Turnover Ratio Calculation
- Home Depot Case Study – Investigating the Rise in Equity Turnover
- Top Companies with High Equity Turnovers
- Internet Industry Equity Turnovers
- Oil & Gas Industry Equity Turnovers
- Restaurant Industry Equity Turnovers
- Software Application Industry Equity Turnovers
- Negative Equity Turnovers Examples
- Limitations of Equity Turnover Ratio
- In the final analysis
What is Equity Turnover Ratio?
Equity turnover ratio is one of the most important ratios used by the organization to find out how much revenue the shareholder’s equity is able to generate over a course a year.
Most investors calculate this ratio before investing into the company because through this ratio they are able to understand how much they would directly affect the revenue of the company.
It may seem a generalized ratio but it’s important because via this ratio one is able to understand the proportion and whether the proportion is negative or positive. In most cases when the equity turnover ratio is more, it turns out to be better for the organization. However, before calculating the proportion we need to know how capital intensive the industry is to which the company belongs.
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Equity Turnover Formula
The formula for equity turnover ratio is simple. All you need to take into account is net sales for the year and then divide it with the shareholder’s equity.
Have a look at the equity turnover formula below –
Equity Turnover Formula = Total Sales / Average Shareholders’ Equity
Now the question is what you would consider as sales.
When you would take sales, it is net sales, not gross sales. A gross sale is a figure which is inclusive of the sales discount and/or sales returns. We would take the net sales and that means we need to exclude sales discount and sales returns (if any) from the gross sales to get the right figure.
To calculate the average shareholders’ equity, we need to take into account the shareholders’ equity at the beginning of the year and at the end of the year. And then we would find the mean of the sum of the total equity (beginning + end).
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Interpretation of Equity Turnover Ratio
There can be no one interpretation of equity turnover ratio. But if you take a general perspective, an increase proportion provides a positive indication and a decrease proportion indicates a negative connotation.
However, there are a couple of things about the ratio we need to pay heed to. Let’s have a look at them –
- The equity turnover ratio varies a lot depending on how capital intensive the industry is. For example, if we take into account the equity turnover ratio of oil refinery industry, it would be much lesser than a service business; because oil refinery needs a large capital investment to generate sales. So the comparison of ratio should be done among companies which belong to the same industry.
- If any company wants to increase the equity turnover ratio to attract more shareholders, they may skew the equity by increasing the debt percentage in the capital structure. This move is very risky as by doing this, the organization is taking the burden of too much debt and eventually they have to pay the debt with interest.
Equity Turnover Ratio Example
Let’s understand equity turnover ratio with an example.
Particulars | Company A (in US $) | Company B (in US $) |
Gross Sales | 10000 | 8000 |
Sales Discount | 500 | 200 |
Equity at the beginning of the year | 3000 | 4000 |
Equity at the end of the year | 5000 | 6000 |
Let’s do the calculation to find out the equity turnover ratio for both the companies.
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First, as we have been given Gross Sales, we need to calculate the Net Sales for both of the companies.
Company A (in US $) | Company B (in US $) | |
Gross Sales | 10000 | 8000 |
(-) Sales Discount | (500) | (200) |
Net Sales | 9500 | 7800 |
And as we have the equity at the beginning of the year and at the end of the year, we need to find out the average equity for both of the companies.
Company A (in US $) | Company B (in US $) | |
Equity at the beginning of the year (A) | 3000 | 4000 |
Equity at the end of the year (B) | 5000 | 6000 |
Total Equity (A + B) | 8000 | 10000 |
Average Equity [(A + B)/2] | 4000 | 5000 |
Now, let’s calculate the equity turnover ratio for both the companies.
Company A (in US $) | Company B (in US $) | |
Net Sales (X) | 9500 | 7800 |
Average Equity (Y) | 4000 | 5000 |
Equity Turnover Ratio (X/Y) | 2.38 | 1.56 |
As mentioned before, if these companies are from similar industry, we can compare the equity turnover ratio of both of them. For Company A, the equity turnover ratio is more than the Company B. That doesn’t mean Company A is doing much better than Company B. It just means that somehow from the ratio we are able to conclude that Company A is able to generate better revenue out of their average shareholders’ equity than Company B.
Now it may happen that Company A has reduced the percentage of equity in the capital structure by increasing the debt for attracting more shareholders. In that case, increases proportion doesn’t indicate a positive result.
Nestle Equity Turnover Ratio Calculation
From the above example, you may have got ideas about how to calculate equity turnover ratio and how it could be a helpful tool for you if you want to invest into any company as a shareholder.
But what is about the real company? How do they calculate equity turnover ratio.
Let’s have a look at the income statement first and then we would have a glance at their balance sheet for the year 2014 and 2015.
Consolidated income statement for the year ended 31^{st} December, 2014 & 2015
Consolidated balance sheet as at 31^{st} December, 2014 & 2015
source: Nestle 2015 Financial Statements
Now let’s calculate the equity turnover ratio of Nestle for the year 2014 & 2015.
In millions of CHF | ||
2015 | 2014 | |
Sales (M) | 88785 | 91612 |
Total Equity (N) | 63986 | 71884 |
Equity Turnover Ratio (M/N) | 1.39 | 1.27 |
As Nestle belongs to FMCG industry, the revenue and the equity is almost equal. We can say the FMCG sector is very much capital intensive. But what is about the oil refinery industry? Is the industry capital intensive? What would be the equity turnover ratio of the oil refinery industry? Let’s have a look.
IOC – Equity Turnover Ratio Calculation
In this section, we will pull out few data from the Indian Oil Corporation’s annual report and then we would calculate the equity turnover ratio for the year 2015 and 2016.
First let’s look at the revenue of Indian Oil Corporation for the year ended 31^{st} march, 2016.
Rupees in crores | March 2016 | March 2015 |
Gross Sales | 421737.38 | 486038.69 |
(-) Sales Discount | (65810.76) | (36531.93) |
Net Sales | 355926.62 | 449506.76 |
Let’s have a glance at share capital of Indian Oil Corporation for the year ended 31^{st} March, 2016.
Rupees in crores | March 2016 | March 2015 |
Share Equity | 2427.95 | 2427.95 |
Rupees in crores | March 2016 | March 2015 |
Net Sales (I) | 355926.62 | 449506.76 |
Share Equity (J) | 75993.96 | 66404.32 |
Equity Turnover (I/J) | 4.68 | 6.77 |
source: IOC annual reports
As Indian Oil Corporation is a very capital intensive corporation, the equity turnover is around 5 and more. But let’s say that we are calculating the equity turnover of a service industry where the need of capital investment is much lesser; in that case, the equity turnover ratio would be much more.
Home Depot Case Study – Investigating the Rise in Equity Turnover
Home Depot is a retail supplier of home improvement tools, construction products, and services. It operates in US, Canada and Mexico.
When we look at Home Depot’s Equity turnover, we see that until 2012, equity turnover was relatively stable at around 3.5x. However, since 2012, Equity Turnover of Home Depot has started climbing up steeply and currently stands at 11.32x (a growth of around 219%)
What are the reasons for such an increase in Equity Turnover.
source: ycharts
Let us investigate and find out the reasons.
Just to refresh, Equity Turnover = Total Sales / Shareholder’s Equity
Equity turnover can increases either because of increase in sales or decrease in equity or both.
# 1 – Evaluating Home Depot’s Increase in Sales
Home Depot Sales increased its revenue from $70.42billion to $88.52, an increase of approximately 25% in 4 years. This increase of 25% in 4 years has contributed to the increase in Equity turnover, however, its contribution is somewhat restricted.
source: ycharts
#2 – Evaluating Home Depot’s Shareholder’s Equity
We note that shareholder’s equity of Home Depot has decreased by 65% in the last 4 years. This means the denominator has been reduced by more than half.
source: ycharts
If we look at Home Depot’s Shareholder’s Equity section, we find the possible reasons for such a decrease.
- Accumulated Other Comprehensive Loss has resulted in lowering of Shareholder’s equity in both 2015 and 2016. It stood at -818 million in 2016 and -452 in 2015. Accumulated other comprehensive losses are adjustments primarily related to foreign currency translations.
- Accelerated Buybacks were the second and most important reason for the decrease in Shareholder’s equity in 2015 and 2016. We note that Home Depot bought back 520 million shares (approx value of $33.19 billion) and 461 million shares (~ value $26.19 billion) in 2016 and 2015, respectively.
Top Companies with High Equity Turnovers
Here are some of the top companies by market capitalization and equity turnovers. We note that Boeing has an equity turnover of 26.4x.
S. No | Name | Equity Turnover | Market Cap ($ million) |
1 | Boeing | 26.4 | 101,201 |
2 | United Parcel Service | 42.0 | 92,060 |
3 | Charter Communications | 195.1 | 86,715 |
4 | Lockheed Martin | 20.5 | 73,983 |
5 | Costco Wholesale | 10.5 | 73,366 |
6 | Yum Brands | 10.7 | 33,905 |
7 | S&P Global | 15.6 | 31,838 |
8 | Kroger | 18.0 | 31,605 |
9 | McKesson | 22.6 | 29,649 |
10 | Sherwin-Williams | 12.2 | 28,055 |
source: ycharts
Internet Industry Equity Turnovers
Below is the list of top Internet companies with its respective Equity Turnovers
S. No | Name | Equity Turnover | Market Cap ($ million) |
1 | Alphabet | 0.7 | 568,085 |
2 | 0.5 | 381,651 | |
3 | Baidu | 1.0 | 61,684 |
4 | Yahoo! | 0.2 | 42,382 |
5 | JD.com | 5.4 | 40,541 |
6 | NetEase | 0.9 | 34,009 |
7 | 0.6 | 12,818 | |
8 | 0.8 | 10,789 | |
9 | VeriSign | (1.1) | 8,594 |
10 | Yandex | 1.0 | 7,405 |
Average | 1.0 |
source: ycharts
- Internet companies have low Equity Turnovers. We note that the average Equity Turnover of the top internet companies is 1.0x
- Alphabet (Google) equtiy turnover is 0.7x, while that of Facebook is 0.5x
Oil & Gas Industry Equity Turnovers
Below is the list of top Oil & Gas companies with its respective Equity Turnovers
S. No | Name | Equity Turnover | Market Cap ($ million) |
1 | ConocoPhillips | 0.7 | 62,063 |
2 | EOG Resources | 0.6 | 57,473 |
3 | CNOOC | 0.5 | 55,309 |
4 | Occidental Petroleum | 0.4 | 52,110 |
5 | Anadarko Petroleum | 0.6 | 38,620 |
6 | Canadian Natural | 0.5 | 32,847 |
7 | Pioneer Natural Resources | 0.6 | 30,733 |
8 | Devon Energy | 0.9 | 23,703 |
9 | Apache | 0.4 | 21,958 |
10 | Concho Resources | 0.3 | 20,678 |
Average | 0.5 |
source: ycharts
- Oil & Gas companies have low Equity Turnovers. We note that the average Equity Turnover of the top Oil & Gas EP companies is 0.5x
- Devon energy has an above average equity turnover of 0.9x
- Concho Resources has a below average equity turnover of 0.3x
Restaurant Industry Equity Turnovers
Below is the list of top Restaurant companies with its respective Equity Turnovers
S. No | Name | Equity Turnover | Market Cap ($ million) |
1 | McDonald’s | 2.5 | 101,868 |
2 | Starbucks | 3.6 | 81,221 |
3 | Yum Brands | 10.7 | 33,905 |
4 | Restaurant Brands Intl | 2.5 | 11,502 |
5 | Chipotle Mexican Grill | 2.2 | 11,399 |
6 | Darden Restaurants | 3.2 | 8,981 |
7 | Domino’s Pizza | (1.5) | 8,576 |
8 | Aramark | 7.1 | 8,194 |
9 | Panera Bread | 4.3 | 5,002 |
10 | Dunkin Brands Group | 11.0 | 4,686 |
Average | 4.6 |
source: ycharts
- Restaurant companies have a higher equity turnover. The average equity turnover of top restaurant based companies is 4.6x
- Please note that Domino’s Pizza has a negative equity turnover of -1.5x
- Dunkin Brands on the other hand has an above average equity turnover of 11.0x
Software Application Industry Equity Turnovers
Below is the list of top Software Application companies with their respective Equity Turnovers
S. No | Name | Equity Turnover | Market Cap ($ million) |
1 | SAP | 0.9 | 112,101 |
2 | Adobe Systems | 0.8 | 56,552 |
3 | Salesforce.com | 1.5 | 55,562 |
4 | Intuit | 2.7 | 30,259 |
5 | Autodesk | 1.3 | 18,432 |
6 | Symantec | 0.7 | 17,618 |
7 | Check Point Software Tech | 0.5 | 17,308 |
8 | Workday | 1.0 | 17,159 |
9 | ServiceNow | 2.9 | 15,023 |
10 | Red Hat | 1.6 | 13,946 |
Average | 1.4 |
source: ycharts
- Like the internet companies, Software application companies also have equity turnover closer to 1x. The top 10 companies in software application has an average equity turnover of 1.4x
Negative Equity Turnovers Examples
Below is the list of Top companies with Negative Equity Turnovers. Negative Turnover arises when the Shareholder’s Equity becomes negative.
S. No | Name | Equity Turnover | Market Cap ($ million) |
1 | Philip Morris Intl | (2.1) | 155,135 |
2 | Colgate-Palmolive | (56.1) | 58,210 |
3 | Kimberly-Clark | (131.9) | 43,423 |
4 | Marriott International | (5.0) | 33,445 |
5 | HCA Holdings | (5.6) | 30,632 |
6 | Sirius XM Holdings | (10.5) | 22,638 |
7 | AutoZone | (6.1) | 20,621 |
8 | Moody’s | (9.3) | 20,413 |
9 | Quintiles IMS Holdings | (9.0) | 19,141 |
10 | L Brands | (100.9) | 16,914 |
source: ycharts
- Kimberly Clark has a negative equity turnover of -131.9x
- Marriort International has a negative equity turnover of -5x
Limitations of Equity Turnover Ratio
Even if Equity Turnover Ratio can be helpful for shareholders before investing into a company, this ratio has some limitations which the potential investors and the company which is calculating the ratio should keep in mind.
- Equity turnover ratio can be manipulated if the company wants to attract more investors. By changing the capital structure of the company (by injecting more debt into the capital), the company can change the equity turnover ratio altogether which the investors may not understand all too well.
- Equity always doesn’t generate revenue. Means if we would like to know the specific relationship between equity and revenue, there would be hardly anything to compare. However, if we compare equity with net income, it’s far more valid.
- Equity turnover ratio is not applicable for a company which mainly focuses on debt for their capital necessity. Though it’s always advisable for a company to go for more equity and less debt, many companies find it useful to take debt instead of going for equity options.
Other articles you may like
- WORKDAY in Excel
- Asset Turnover Ratio
- Cash Conversion Cycle
- Quick Ratio
- Current Ratio
- Capital Gearing Ratio
- Working Capital Ratio
In the final analysis
Equity turnover ratio may seem useful to the equity investors and even for the company which is more equity capital intensive. But for the rest of the investors and companies, other ratios are more useful than equity turnover ratio e.g. return on equity, return on investment, debt-equity ratio, inventory turnover ratio etc. Like cash ratio, this ratio is also not being used much, but if you want to get a big picture on net sales and want to do a comparison between the net sales and the equity, through this ratio you would be able to understand that.
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