This financial metric explains how the Indian economy will take some time before it is back on track

• The Indian economy has shown several signs of recovery and analysts are bullish about the capex cycle revival.
• However, one metric shows that several key sectors – including power, realty, FMCG and agriculture, are yet to improve their performance when compared to FY19, the year before Covid.
• On a positive note, several other important sectors like telecom, metals, textiles, among others, have improved their performance already.

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

The Indian government set out a massive ₹111 lakh crore plan to rejuvenate capex and has also encouraged the private sector to pull its weight. But the Covid pandemic in 2020 played spoilsport and delayed capex spending by a couple of years. Now, analysts say they are finally seeing the much-awaited capex cycle revival.

But capex alone does not tell us if we are headed in the right direction, which is where other metrics like capacity utilisation and asset turnover ratios come into play.

While capacity utilisation is a metric provided by the RBI, asset turnover ratios can be computed independently based on the financial statements of companies. Asset turnover ratio can also be considered a proxy for capacity utilisation, since it measures how much revenue a company is generating with its fixed assets.

What is the asset turnover ratio?

As the name suggests, asset turnover ratio measures the value of a company’s sales or turnover against the assets it has. In other words, it shows how efficient a company is in utilising its assets to generate revenue.

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

Why is asset turnover ratio important?

Asset turnover ratio helps in comparing companies with different levels of assets and revenues, since the comparison is done in terms of efficiency and not raw numbers.

It is worth noting that different sectors have different levels of desirable asset turnover ratios. For instance, the FMCG sector has a relatively high asset turnover ratio, while a real estate company has a lower ratio.

As such, this ratio is useful for comparing the performance of companies in the same sector.

Which sectors have the best asset turnover ratios in India?

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

Surprisingly, the distress in the telecom sector seems to have alleviated slightly, with its performance now better than FY19.

The trading sector has also seen a drastic improvement (not included in the chart for better representation of other sectors) – its asset turnover ratio surged from 18.25 in FY19 to 22.96 in FY22.

Which sectors need to improve their asset turnover ratios?

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

The diamond and jewellery sector has to improve the most – its asset turnover ratio stood at 9.16 in FY22, versus 13.54 in FY19.

SEE ALSO:

Gautam Adani’s overly ambitious growth plans can spiral into a massive debt trap: CreditSights report

India on the cusp of the post-Covid capex boom, say analysts

Adani group sheds ₹94,000 crore in value after a report says it’s ‘deeply over-leveraged’