Thread by @soicfinance

Capacity utilisation essentially means how much of the capacity is currently being used for production.

Capacity utilisation is a very good concept when it comes to cyclicals or companies where a substantial capex has been done but the capacity remains unutilized due to low demand or regulatory approvals not being completed.

Coming to Asset turns:
Gross Asset Turns or also known as gross block turnover. Reflects the sale that is generated per Rs of gross asset on the balance sheet.

Net Asset Turns:
Net Asset turns or also known as netblock turnover reflects the sales that are generated from assets net of accumulated depreciation.

Important to note what you see on the balance sheet is nothing but Net fixed assets(not gross fixed assets). As depreciation is a contra asset (those assets that reduce Assets on the balance sheet) and is indirectly charged off

from P&L which reduces the retained earnings on the left side (liabilities) and reduces the Fixed assets on the right side (assets side). Thus, a balance sheet balances.

To get gross assets you need to look at the schedule of property, plant and equipment given in the annual report.

Asset turns increasing leads to an increase in capacity utilization. As it indicates that you’re able to generate more sales using the same assets. Perhaps the most recent example here is:

Laurus Labs in recent times. Where 60% of gross block was lying idle, basically generating 0 topline. As utilisation picked up, gross block turns improved and we got an explosion in operating leverage and margins. Check the Pat growth in the last 2 years.

You can use Asset turns to forecast sales too. Eg:- Navin Fluorine is doing 2 separate capital expenditures (capex/addition to fixed assets)

The first one is in a MPP, where they are investing 195 crores. Expecting asset turns of 1.35 to 1.45x. Thus, to forecast sales simply multiply 195 by 1.35 or 1.45. peak sales of 260-280 crores.

The second one is HPP plant, where they are investing 435 crores. 365 crores for the plant and 70 crores for power generation plant (captive). Contract is worth 2800 crores over 7 years basically back of the envelope 400 crores a year.

435 crores of assets generating 400 crores of sales. Reflects asset turns are 0.9x.Additionally, these two capex will lead to sales growth by 660 crores. Using this data point you can make a rough guesstimate about the future sales of the co.