Two consumer-goods companies with same ROE and same P/E can have wildly different asset quality. One turns its inventory 6 times a year; the other turns it 2 times. Asset turnover is the silent quality differentiator.
Inventory Turnover
Inventory Turnover = COGS / Average Inventory
Higher = faster sell-through. Lower = goods piling up.
Indian benchmark ranges
| Sector | Best-in-class | Industry avg | Distress |
|---|---|---|---|
| FMCG | 10-15x | 6-8x | < 4x |
| Retail (DMart) | 12-18x | 6-10x | < 4x |
| Auto | 8-12x | 5-7x | < 3x |
| Cement | 15-25x | 10-15x | < 6x |
| Pharma (formulations) | 4-6x | 2-4x | < 1.5x |
| Steel | 6-10x | 4-6x | < 2x |
Always benchmark within sector. Pharma 4x is normal; FMCG 4x is distress.
Fixed Asset Turnover
Fixed Asset Turnover = Revenue / Net Fixed Assets
How efficiently the company sweats its plant + equipment. Higher = more revenue per rupee of capex.
- Asset-light businesses (IT, FMCG): 3-8x typical.
- Asset-heavy (cement, steel, power): 0.5-2x typical.
- Capex inefficiency: Fixed asset turnover declining over 3+ years while revenue growth lags.
The 3 quality questions inventory analysis answers
1. Is demand strong?
Rising inventory turnover = goods flying off shelves = strong demand. Falling turnover = sales weakness emerging before it shows in revenue.
2. Is management disciplined?
Best-in-class operators (HUL, DMart, Maruti) maintain consistent inventory cycles. Weaker management lets inventory build up to hide demand weakness or under-orders to prop up margins.
3. Is capex paying off?
Companies expanding capacity should see fixed asset turnover stabilise or improve within 18-24 months of plant commissioning. If turnover keeps falling = new capacity not being utilised = bad capital allocation.
The DMart case study
Avenue Supermarts (DMart) runs inventory turnover of 14-18x — among the highest in global retail. Walmart by comparison runs 8-10x.
How: small assortment + high-velocity SKUs + just-in-time procurement + no credit to suppliers. The high turnover is why DMart sustains 25%+ ROE despite low single-digit margins.
Red flags to scan
- Inventory growing 2x revenue growth rate. Stocking ahead of soft demand.
- Inventory days > 1.5x sector median. Slow-moving stuff or obsolete goods.
- Sudden inventory write-downs in Q4. Quarterly stuffing finally unwinding.
- Auditor commentary on inventory provisioning. Big tell — auditors don't flag without cause.
How to use this in screening
- Filter top quartile inventory turnover within sector.
- Cross-check fixed asset turnover stable or improving.
- Verify revenue growing in line or faster than asset base.
- Confirm working capital ratio healthy (see working capital guide).
Combine with ROE/ROCE and P/E filters for the quality-value sweet spot. Asian Paints, Pidilite, Bajaj Finance all sit in top inventory-turnover quartile of their respective sectors — among the reasons they compound.
Use the Quality + Value screener as starting universe, then drill into inventory cycle in annual reports.