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Capital Turnover Ratio

Meaning: This ratio expresses the relationship between net sales and capital employed. It is computed as:

Capital Turnover Ratio = Net Sales / Capital Employed

Components: It has two variables – net sales as numerator, i.e., total sales minus sales returns and capital employed, i.e., Shareholders’ funds and long-term debts. The objective is to ascertain the efficiency of the capital employed. Interpretation. A higher ratio indicates more profits while low ratio would indicate that the sales are low in comparison with the funds available resulting in low profits. A very high capital turnover ratio would indicate overtrading or under capitalization.

Fixed Assets Turnover Ratio

This ratio is based on the relationship between net sales and net fixed assets. It is calculated as:

Fixed Assets Turnover Ratio = Net Sales / Net Fixed Assets

Fixed assets mean assets in use. Thus an advance payment for the purchase of a fixed asset is not included as it is not a part of operating fixed asset. This ratio discloses the efficiency of assets utilization. It indicates the firm’s ability to generate sales per rupee of investment in net fixed assets. A higher ratio means more be clarified that there is no direct relationship between the sales and fixed assets since sales may be influenced by quality of the product, after sales-service, advertisement, etc.

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