The Revenue and Income Per Employee ratios, together with the Asset Turnover ratio, provide a sense of how labor intensive the company's operations are. Lower levels of Revenue and Net Income per Employee suggest greater degrees of labor intensity. Asset turnover, defined as revenues for the Trailing Twelve Month (TTM) period divided by average Assets for that interval (average assets is calculated by adding the assets for the 5 most recent quarters and dividing by 5.), tells you how quickly the company is converting its physical asset base into sales. Lower ratios suggest high degrees of capital intensity.

Normally, there's nothing inherently good about labor intensity versus capital intensity. But that could change based on developments in the overall economic environment. For example, if you expect labor costs to escalate rapidly, you may decide to focus on sectors and industries that are less labor intensive than the S&P 500. Conversely, expectations regarding interest raters can, for better or worse, affect your willingness to invest in firms that are more capital intensive than the S&P 500.

The Asset Turnover ratio is also important because it provides a vital backdrop for interpretation of margins. In our discussion of the Profitability comparisons, we stated that one should not automatically eliminate low-margin companies from consideration. Low margins can be perfectly fine if combined with high levels of turnover. The reverse is also true: low turnover can be combined with high margins. Variations in turnover/margin characteristics reflect the nature of a given business, rather than managerial success or failure. Net Margin and Asset Turnover can be combined into a single concept, Return on Assets, that will help you compare companies in different businesses with different margin/turnover characteristics. This concept can be explored in depth on the Management Effectiveness table. Whether or not you expect any developments that would cause you to lean toward labor or capital intensity, you should always note company-to-industry comparisons along these lines.

The Receivable and Inventory ratios can be very important indicators of the underlying health or deterioration of a business. Receivable Turnover is calculated as TTM Revenues divided by average accounts receivables (average receivables is calculated by adding the receivables for the 5 most recent quarters and dividing by 5). Inventory Turnover is defined as TTM cost of revenues divided by average inventory (i.e., total inventory for the 5 most recent quarters and divided by 5). The most important comparisons here are between company and industry. Below par Receivables Turnover ratios suggest that the company may be finding it difficult to collect money owed by customers who took delivery of products. Low Inventory Turnover ratios suggest that the sales may be slowing, causing a growing stockpile of unsold goods. If that's taking place, the company will eventually have to cut production to allow stockpiles to diminish and/or slash prices to move slow-selling products. Although low Receivable and Inventory Ratios always require investigation, they don't always signal danger. For example, a company may deliberately build inventories to support the launch of a new product or in anticipation of a peak selling period.