What Are Turnover Ratios? (With Types and Examples)

By Indeed Editorial Team

Published May 5, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Turnover ratios, also called turnover rates, are a critical component in understanding how to operate a financial portfolio successfully. The turnover rate is the percentage of a portfolio's holdings that shifted or needed replenishing in a fiscal year. Understanding turnover rates can be essential and an advantage for anyone wanting to enter the financial industry. In this article, we define what turnover rates are, discuss why they're important, explore types of turnover rates, and review some examples.

What are turnover ratios?

Turnover ratios are the percentage of a portfolio's equities that a firm replenished in a fiscal period. For some companies and organizations, this can be the calendar year or any other 12-month period that denotes the fiscal year. A simple example of a turnover rate may be a company that buys 800 stocks and replaces 600 of them. The company might have a turnover rate of 75%. Not all investment funds hold their investments for more than a year. This means they might have a turnover rate of more than 100%.

If a portfolio or fund's turnover rate surpasses 100%, that usually indicates that most of the holdings are replenishing. This is not always the case, as it doesn't necessarily mean that the company has replaced 100% of the holdings.

Why are turnover rates important?

Turnover rates can change depending on several circumstances and situations, such as the type of fund, the investment goal, and the style of the investor. By itself, the turnover rate may present little inherent value. High and low turnover rates aren't reliable indicators of how a fund performs over a set period. There are a few variables that high and low turnover rates can indicate, which include:

Higher and lower turnover rates

Frequent turnover can produce high costs for the mutual fund or investment vehicle because of the payment of commissions when buying and selling stocks. High costs can cause a fund's return to waver. The higher the turnover in a fund, the more likely it is to produce short-term capital gains, which the federal government can tax at an investor's regular income rate. For example, a fund focused on bonds usually increases turnover because day-trading is an important part of bond investments.

Active mutual funds with a decreased turnover rate can show an investment strategy focused on holding the investment for long periods. For example, an index fund can have a low turnover rate because it usually replicates a particular index, and companies normally fix their portfolios in indexes. A high turnover rate may suggest an intention to profit by timing the market profitably. Small-cap growth stock funds can sometimes experience higher turnover than a cheap stock fund. These types of funds usually invest in companies that they project to grow faster than other small-cap stocks.

Related: How to Write an Investment Banking Resume (With Template)

How can you interpret turnover rates?

The turnover rate of any fund or investment vehicle is often not the only factor for buying or selling investments. Turnover rates can be useful to measure how a certain fund's turnover rate compares with similar investment strategies. They can also act as quick ways to signal their risk profile for investors with different appetites for risk. For example, a conservative-minded investor may target funds with turnover rates of under 40%.

If a turnover rate is substantially different from comparable funds, that may indicate the fund is not performing optimally. If many funds following an index have turnover rates around 15%, and one fund finished with 45% turnover in one year, that's a sign that investors can use to investigate further. There are a few questions about how turnover rates can help investors to make sound investment decisions. These questions may include:

  • Has the fund's management changed?

  • Have the overall goals of the fund changed significantly?

  • How does the fund's turnover rate differ from similar investment strategies?

Related: Cash Accounts vs. Margin Accounts: How to Invest Responsibly

Types of turnover ratios and how to calculate them

A turnover rate can point out how well a company is leveraging its equities. It can also indicate how a company how often the company is paying off its obligations. There are six types of turnover rates, these include:

Inventory turnover rate

Inventory turnover rate is an indicator that shows how many times an organization renews its inventory and how many times they do this within a given period. Turnover rates can also help forecast a company's inventory, which can affect its value and productivity. This period goes from the moment a company purchases a commodity and the time they sell it. Here is the formula of inventory turnover rates:

Inventory turnover rate = cost of goods sold / average inventory

Receivables turnover rate

This rate is an accounting evaluation tool used to determine how effectively an organization issues credit and collects debt. An organization that is excellent at collecting the customer's debt may present a higher receivable turnover rate. Here is the formula of receivables turnover rates:

Receivables turnover rate = net credit sales / average accounts receivable

Asset turnover rate

This rate is another accounting evaluation tool used to determine how efficiently an organization's assets are in producing sales and revenue. An organization that is efficient in generating revenue from their assets may present a higher asset turnover rate. Here is the formula of asset turnover rates:

Asset turnover rate = total sales / beginning assets + ending assets / 2

Accounts payable turnover rate

This rate can determine how quick an organization is in fulfilling its obligations to contractors, vendors, and suppliers. Accounts payable turnover can also indicate how efficient is a company at paying off its obligations. Here is the formula of account payable turnover rates:

Accounts payable turnover rate = total supply purchases / beginning accounts payable + ending accounts payable / 2

Examples of turnover rates

Here are a few examples of where you might encounter turnover rates:

Example 1: inventory turnover rate

Pearson Pages is an Ontario-based manufacturer specialized in producing handmade notebooks. The summer is their best and busiest period of the year and to satisfy the demand, they acquire $50,000 in raw material. They usually have an average inventory of $25,000 before the scholar year. Using the formula, the company's CFO calculates the inventory turnover rate:
Cost of goods sold: $50,000
Average inventory: $25,000
Formula: 2 = $50,0000 / $25,000
The inventory turnover rate of Pearson Pages is 2.

Example 2: receivables turnover rate

Alberta eStores is a Calgary-based online grocery store, specialized in selling various types of bread and sandwiches. They just reported one million dollars in net credit sales obtained during 2021. They also recorded $125,000 of average account receivables. Using the formula, the company's CFO calculates the receivable turnover rate:
Net credit sales: $1,000,000
Average account receivables: $125,000
Formula: 8 = $1,000,000 / $125,000
The receivables turnover rate of Alberta eStores is 8.

Example 3: assets turnover rate

Toronto Cars is a Toronto-based car dealer specialized in selling sports cars and customized trucks. During the summer, they recorded their highest demand period. They registered $50 million in total sales, $15 million in assets when the fiscal year started, and one million dollars when the period ended. Using the formula, the company's CFO calculates the inventory turnover rate:
Total Sales: $50,000,000
Beginning assets: $15,000,000
Ending assets: $1,000,000
Formula: 6.25 = $50,000,000 ($15,000,000 + $1,000,000) / 2
The assets turnover rate of Toronto Cars is 6.25.

Related: 4 Steps for How to Become an Investment Banker (With FAQs)

Example 4: accounts payable turnover rate

Vancouver Mattresses is a British Columbia-based manufacturer specialized in producing economic mattresses with recycled material. The winter is their best and busiest period of the year, and after fulfilling their customers' orders, they reported total purchases of $10 million for the year. They also recorded that their accounts payable at the beginning of the year were $400,000 and four million dollars at the end of the year. Using the formula, the company's CFO calculates the accounts payable turnover rate:
Total supply purchases: $10,000,000
Beginning accounts payable: $400,000
Ending accounts payable: $4,000,000
Formula: 4.55 = $10,000,0000 / ($400,000 +$4,000,000) / 2
The inventory turnover rate of Pearson Pages is 4.55.

Related: A Guide to Calculating the Rate of Return (With Examples)

Example 5: turnover rates

Milton Investment Fund, an Ontario-based fund specialized in bonds and equities, invests in startup companies and in pharmaceutical large corporations. They usually follow a strong buy-and-sell strategy and aim at companies with total market capitalizations of over $100 million. Usually, the startups show continued profitability, comprehensive development, average profits expansion, solid records, and financial responsibility and transparency. At the end of 2021, Milton Investment Fund presented a turnover rate of 15%. This shows that they only shifted 15% of their equities during 2021.

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