This financial metric explains how long it will take for the Indian economy to get back on track

• The Indian economy has shown several signs of recovery and analysts are optimistic about the revival of the investment cycle.
• However, one metric shows that several key sectors – including energy, real estate, FMCG and agriculture – have yet to improve their performance compared to FY19, the year before Covid.
• On the positive side, several other key sectors such as telecoms, metals and textiles have already improved their performance.

The Indian economy is showing signs of recovery after the Covid pandemic wreaked havoc over the past two years. However, it still has a long way to go before it gets back on track — and this simple but crucial financial metric explains where we are today.

The Indian government has unveiled a massive 111 lakh crore plan to rejuvenate capital spending and also encouraged the private sector to increase its weight. But the Covid pandemic in 2020 played spoilsport, delaying capital spending by a few years. Now analysts say they are finally seeing the long-awaited revival of the investment cycle.

But investments alone don’t tell us if we’re moving in the right direction, and that’s where other metrics like capacity utilization and turnover come into play.

While capacity utilization is a metric provided by RBI, asset turnover rates can be calculated independently based on companies’ financial statements. The capital turnover ratio can also be seen as an indicator of capacity utilization, as it measures how much revenue a company makes from its fixed assets.

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The Indian economy has shown several signs of recovery and analysts are optimistic about the revival of the investment cycle. However, one metric shows that several key sectors – including energy, real estate, FMCG and agriculture – have yet to improve their performance compared to FY19, the year before Covid. On the positive side, several other key sectors such as telecoms, metals and textiles have already improved their performance.

What is Asset Turnover Ratio?

As the name suggests, the asset turnover ratio measures the value of a company’s sales or revenues compared to the assets it has. In other words, it shows how efficiently a company is using its assets to generate revenue.

A high capital turnover ratio shows that the company is efficient, while a low ratio suggests that it is inefficient.

Why is the asset turnover ratio important?

The asset turnover ratio helps when comparing companies with different assets and revenues because the comparison is made in terms of efficiency, not raw numbers.

It’s worth noting that different sectors have different levels of desirable asset turnover rates. For example, the FMCG sector has a relatively high capital turnover ratio, while a real estate company has a lower ratio.

Therefore, this ratio is useful for comparing the performance of companies in the same industry.

Which sectors have the best asset turnover ratios in India?

According to a Bank of Baroda Research report, only 15 out of 40 sectors saw significant improvement in their asset turnover ratios in FY22 compared to FY19. This shows that the Indian economy still has some way to go before it can be said to be back on track.

Surprisingly, the telecom sector’s distress appears to have eased somewhat as its performance is now better than it was in fiscal 2019.

Sectors with the best asset turnover rates in FY22Business Insider India / Flourish

The trade sector has also seen a dramatic improvement (not included in the chart to better reflect other sectors) – its asset turnover ratio rose to 22.96 in FY22 from 18.25 in FY19.

Which sectors need to improve their turnover rates?

On the other hand, most core sectors like power, energy, real estate and even FMCG have seen relatively little improvement in their asset turnover ratios.

The diamonds and jewelery sector needs the most improvement – its asset turnover ratio was 9.16 in FY22 versus 13.54 in FY19.

Sectors that need to improve their turnover ratesBusiness Insider India / Flourish

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