Can Change In Asset Turnover Predict Future Return?

In this Academic-Style Research we tested a fundamental factor, change in asset turnover, on a global universe of stocks. Asset turnover is a measure of efficiency, the ratio analyzes how efficient a company is in the use of its assets. Asset turnover answers the question: How much revenue does a company generate for each unit of assets?

Hypothesis

Investing in companies with high change/improvement in asset turnover generates share price outperformance.

Universe

A global universe of stocks from June 2006 to April 2017. Only included companies with a minimum market cap of US$500m  (no micro caps) and more than US$3m in 3MADTO (no illiquid stocks). On average, the universe consisted of 3,200 stocks per quarter.

Methodology: Testing the relationship between asset turnover change and return

Asset Turnover Future Return

We winsorized at +/- 3 standard deviations to exclude outliers. Divided the universe into deciles and added two additional groups: Top 15 and Bottom 15. We calculated the equal-weighted return for each group. The groups were reselected and rebalanced each quarter. All returns are presented in US dollar terms.

Asset turnover change didn’t show any clear relationship with return

Asset Turnover Future Return

Asset turnover change didn’t show any clear relationship with return for a global universe.

No clear relationship with terminal wealth either

Asset Turnover Future Return

Looking at the Top 15 and Bottom 15, they both had periods of outperforming and underperforming the universe. Over the whole time period, both groups have outperformed the universe.

No clear relationship with risk-adjusted return

Asset Turnover Future Return

Return adjusted for volatility shows asset turnover change didn’t have any clear relationship with risk-adjusted return for a global universe.

Asset turnover change was an unsuccessful factor

Asset Turnover Future Return

A successful quarter is when that group of stocks returned more than the equal-weighted universe. The success rate is given by the number of successful quarters divided by the total number of quarters. Top 15 and Decile 1 had a success rate above 50%, but so did the Bottom 15 and Decile 9.

What you have learned

Asset turnover change didn’t show any clear relationship with return for a global universe. Overall it showed to be an unsuccessful factor.

Article by Dr. Andrew Stotz, Become A Better Investor




About the Author

Dr. Andrew Stotz, CFA
Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company providing institutional investors with ready-to- invest portfolios in Asia that aim to beat the benchmark through superior stock selection. The company also provides buy- and sell-side clients with financial models to value any company in the world and World Class Benchmarking to determine what companies are financially world class. Previously, as Head of Research at CLSA, Andrew was voted No. 1 Analyst in Thailand in the Asiamoney Brokers Polls for 2008 and 2009. He was also voted No. 1 Analyst in Thailand in the 2009 Institutional Investor magazine All-Asia Research Team Report. Andrew earned his PhD in finance at the University of Science and Technology of China in Anhui province, with a focus on answering questions raised by fund managers and analysts during his career about picking stocks and managing portfolios. In addition, Andrew has been a lecturer in finance for 22 years at various universities in Thailand. Since 2013, he has been the president of the CFA Society of Thailand. He is also the author of How to Start Building Your Wealth Investing in the Stock Market.