Nice Assets
“The goal is not to grow bigger; the goal is to grow better.” — Peter Drucker
What’s your favorite underrated financial metric? (seriously, reply and let me know)
Mine is the asset turnover ratio (total sales divided by total assets), and I finally came across a great example of it in the wild: fast-casual restaurant chain, Portillo’s (case study below).
[Quick PSA: I write a weekly stock-focused newsletter which weaves in a healthy dose of financial analysis.]
Asset turnover is easily overlooked and incredibly simple/powerful. It tells me how efficiently a business is using its resources (i.e. assets).
1) What is it?
As its core, asset turnover measures how much revenue a business produces for every $1 of total assets in the company.
Asset Turnover = Sales ÷ Assets
Every business has to buy or build assets to operate, whether it’s physical stuff like trucks or machinery, receivables, or even cash (yes, it’s possible to hold an inefficient amount of cash). Assets tie up cash and capital.
If Company A has $1m in assets, Company B has $2m in assets, and both companies generate $5m annual revenue, then Company A is clearly being more efficient in generating that revenue.
2) Why it matters?
We’re not hoarders, we’re running businesses. If assets tie up cash/capital, then wouldn’t it be nice to have a “quick and dirty” way to see whether we have too much stuff?
Remember the golden rule here: assets drive increased revenue. You do not want more assets unless they lead to more revenue (or perhaps lower costs if an asset improves productivity).
If assets are increasing, then cash is most likely going out the door to pay for them. You should care because this has a direct implication on your cash flow.
3) How to use it?
This is a great metric for your ratio scorecard. Track it each month using a rolling 12-month view of your numbers. That’s your starting point.
Rule of thumb, if asset turnover is:
- Increasing = improving efficiency
- Decreasing = lower efficiency
- Below peers = less overall efficiency
- Above peers = more overall efficiency
It helps to dig a layer deeper and understand why the ratio is trending. Example: increasing turnover might mean stronger sales relative to a steady base of assets (a good sign), but it could mean underinvestment in assets (i.e. aging machinery which will soon need replacement, etc.).
Similarly, a declining ratio could be warning that assets aren’t getting utilized (rental equipment a great example), but it could also mean recent expansion which hasn’t converted into higher sales yet.
4) A quick case study
In my weekly review of the markets, I came across Portillo’s, a popular Chicagoland restaurant selling hot dogs, Italian beef sandwiches, etc. It’s a Midwest institution.
Shares declined >80% since their 2021 IPO, but sales increased from $450m in 2018 to $730m as of mid-2025, and EBITDA grew from $75m to $104m. What gives?
A summary view of the numbers show a rapid increase in new restaurants (from 57 to 94) which translated into more assets ($887m to $1.55bn). Sales increased 50% since 2019 but assets grew 75%!
Sure, a number of other factors are at play here (falling margins, high debt, same-store sales declining, etc.), but a very quick and easy litmus test is/was asset turnover:
From 2019 to 2025, every $1 of assets generated 13.5% less revenue. That’s a big swing. Translation? On an asset base of $1.55bn, Portillo’s should be generating revenue of $840m instead of the $730m they’re currently doing. Piling onto the problems, similar sized peers like Texas Roadhouse, Chipotle, and Cheesecake Factory each have turnover ratios >1x. Hmm…