Can Change In Asset Turnover Predict Future Return?

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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?

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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.

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Methodology: Testing the relationship between asset turnover change and 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

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In 1992 Dr. Andrew Stotz, CFA, left a management career at Pepsi-Cola in California to teach finance in Thailand. In 1993, he found his life calling as a financial analyst, a job for which he was eventually voted #1 in Thailand. In the second half of his 20-year career in investment banking, Dr. Stotz was a Head of Research, leading teams of financial analysts. He served as a two-term president of CFA Society Thailand and now runs his firm, A. Stotz Investment Research, which provides research and tools for institutions and high-net-worth investors and helps CEOs make their companies financially world class.
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