CAPITAL TURNOVER

TURNOVER RATIOS

INTRODUCTION
 Turnover

Ratios are also known as activity ratios. They measure the efficiency or effectiveness with which a firm manages its resources or assets. They are so called because they indicate the speed with which assets are converted or turned over into sales. This category of ratio includes those ratios which

TYPES OF TURNOVER RATIOS
1. 2. 3. 4.


INVENTORY TURNOVER RATIO ASSETS TURNOVER RATIO CAPITALS TURNOVER RATIO RECEIVABLES/DEBTORS TURNOVER RATIO 5. PAYABLES TURNOVER RATIO


INVENTORY TURNOVER RATIO
turnover or stock turnover – this indicates whether inventory has been efficiently used or not.  Inventory turnover = Cost of Goods Sold  Average Stock
 

 Inventory

Cost of Goods Sold = (opening stock + purchases + direct expenses) – closing stock

ASSETS TURNOVER RATIO
ratio shows the relationship between total assets and sales of the concern.  ASSETS TURNOVER = NET SALES  TOTAL ASSETS 1. Fixed assets turnover = Sales  Fixed Assets 2. Current assets turnover = Sales


 This

CAPITAL TURNOVER
These ratios are calculated to study the uses of various types of capital.  The various turnovers are as under:




1.

turnover.

TOTAL CAPITAL TURNOVER: Is the same as assets
FORMULA:Sales or Cost of Sales Total Capital Employed








2.

and sales. Capital employed is either equal to SHAREHOLDER’S FUND plus LONG TERM LOANS or equal to TOTAL ASSETS minus CURRENT LIABILITIES.

CAPTAL TURNEOVER: Ratio between capital employed

  


FORMULA:-

Sales Capital Employed

3.

WORKING CAPITAL TURNOVER : Is the same as net

RECEIVALBLE TURNOVER
 This

ratio is also called as DEBTORS TURNOVER RATIO OR DEBTORS VELOCITY RATIO  It measures the numbers of times the receivables rotate in a year in terms of sales  It is also calculated to measure the efficiency of credit policy and credit collection
 

FORMULA :



RECEIVABLE TURNOVER =

Net

PAYABLES TURNOVER
 It

is also known as CREDITOR’S VELOCITY or CREDITOR’S TURNOVER.  It shows the relationship between NET PURCHASES for the whole year and TOTAL PAYABLES.  It indicates the number of times the payables rotate in a year.


FORMULA : PAYABLES TURNOVER = Net Purchases  Payables





PROBLEMS ON TURNOVER RATIOS


INVENTORY TURNOVER RATIO
Following inventory data have been taken from the financial records of ALFA LTD.  Inventory opening = Rs. 35,000  Purchases = Rs. 2,60,000  Sales = Rs. 3,00,000  Closing inventory = Rs. 65,000 Calculate inventory turnover ratio:


Sol=> Inventory Turnover Ratio= Cost of Sales  Avg. Stock Cost of Sales= Opening Stock + Purchases - Closing Stock  = 35,000+2,60,000-65,000  = Rs. 2,30,000 Avg. Stock= Opening + Closing Stock = 35000+65000 = Rs. 50,000  2 2  Therefore, ITR = 2,30,000 = 4.6 times


ASSETS AND CAPITAL TURNOVER RATIO
Following is the b/s of ABC CO. LTD. Share capital 4,00,000 Fixed assets 3,50,000 Debentures 50,000 Stock 70,000 Creditors 50,000 Debtors 50,000  Cash 30,000  5,00,000 5,00,000 Sales for the yr. amounted to Rs.7,00,000. calculate different types of turnover of assets and capital:

RECEIVABLES RATIO
the following find out receivables turnover ratios:Net sales 13,41,300 Receivables 2,82,200
 

 From

Sol => Receivables Turnover = Net Sales Avg. Receivable = 13,41,300





PAYABLES TURNOVER RATIO
the following find out the payables turnover:Net purchases 4,00,000 Payables 80,000
 

 From

Sol => Payables Turnover = Net Purchases Payables = 4,00,000



