What’s unspoken about growth, returns
Most investors are obsessed over earnings, margins and market share. But sometimes, the most revealing signs of a company’s future performance aren’t found in the income statement—they’re tucked away in how the business manages its balance sheet.
One financial ratio that deserves more attention, especially in times of aggressive expansion, is the sales to total assets (S/TA) ratio.
At its core, this ratio tells us how efficiently a company is generating revenue from the resources it controls. It compares how much a firm sells in a given period to the total value of everything it owns—its factories, land, equipment, inventory and other assets.
When a company expands its asset base without a meaningful increase in sales, it signals that those assets may not be working hard enough. On the other hand, a firm that delivers strong revenue on a modest asset base shows a strong operational discipline in the way it uses capital.
This is why the S/TA ratio matters: while it doesn’t measure profitability, it answers a more fundamental question—how effectively does the company convert investment into output?
In the Philippine Stock Exchange (PSE), many listed companies are coming off a decade of expansion, yet the S/TA ratio still doesn’t receive the attention it deserves.
Assessing companies using this ratio isn’t as simple as applying a single cutoff. There’s no one-size-fits-all benchmark for what makes the ratio healthy, because each industry operates with its own capital structure and asset intensity.
Retailers and consumer goods companies, for instance, tend to post the highest turnover ratios. A well-run grocery or apparel chain typically generates high sales relative to its asset base, with ratios ranging from 2.0 to 4.0. If a retailer reports a ratio of 1.2 or lower, it may indicate overexpansion or underperforming stores.
If we look at the listed companies in the retail sector on the PSE, we will find that many firms have grown their asset base faster than their sales can justify. While the median S/TA ratio improved slightly—from 1.09 in 2019 to 1.15 in 2024, a closer look reveals that a proportion of companies with ratios below 1.2 increased significantly, from 62.5 percent in 2019 to 75 percent in 2024.
This suggests that although a few strong performers—such as Philippine Seven, with a high S/TA ratio of 2.08—are pulling the median upward, most retailers are becoming less productive.
Real estate companies, on the other hand, typically operate with much lower turnover ratios, usually between 0.2 and 0.4. This isn’t inherently bad, given the capital-intensive nature of property development.
However, if the ratio falls below 0.2 and remains there for several years while assets continue to grow, it could indicate that capital is being locked into projects with delayed revenue potential.
The median S/TA ratio of the property sector in the PSE was already low at 0.18 in 2019, even before the pandemic. By 2024, it had slipped further to 0.16. Further analysis shows that the share of property developers with S/TA ratio below 0.20 rose sharply from 58.3 percent in 2019 to 90.9 percent in 2024.
This suggests that a growing number of firms are struggling to convert their landbank and ongoing projects into actual revenue, which raises concerns about capital efficiency and weak revenue realization.
For capital-intensive service providers—such as telecom companies, airlines, utilities and similar businesses—a lower S/TA ratio is expected due to the nature of their operations. As a result, a healthy S/TA ratio for this sector typically falls between 0.3 and 0.8.
If a company’s ratio drops below 0.3, it becomes a potential red flag, as it may indicate that capital is tied up in underutilized assets. In the PSE, the median S/TA ratio for this sector has declined from 0.42 in 2019 to 0.35 in 2024. While the ratio remains within a generally safe range, the downward trend suggests that efficiency across the sector may be weakening.
Perhaps the manufacturing sector is the only bright spot in the PSE. In this sector, a healthy S/TA ratio typically falls between 0.8 and 1.5. When the ratio drops below 0.8, it may indicate inventory buildup or underutilized capacity. The median S/TA ratio for manufacturers in the PSE has improved slightly from 0.82 in 2019 to 0.90 in 2024.
At first glance, this may appear encouraging. However, when nearly all other sectors are showing declines, a rising S/TA ratio in manufacturing could partly reflect reduced asset investment. If companies are generating higher turnover by holding back on reinvestment or deferring capital expenditure, the improvement may be temporary—and potentially unsustainable.
The declining trend in the S/TA ratio across most sectors points to deteriorating capital efficiency and weakening fundamentals. If this persists, it could lead to earnings downgrades and poor asset returns, which could drive the market toward further downside.
