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Turnover Rations

The management is also concerned about ratios apart from the ratios discussed so far. The turnover ratios measure the efficiency in asset management. This is measured by testing the relationship between sales and assets of an enterprise. Other things remaining the same greater the rate of turnover, the more efficient the management is. Some of the important turnover ratios are discussed below.

(a)    Capital Turnover Ratio

This ratio measures the relationship between Sales and Capital  employed.

Capital Turnover Ratio = Cost of Good Sold / Capital Employed = Rs. 15,00,000 / Rs 5,00,000 = 3

where,          Cost of goods sold = Opening Stock + Purchases + Direct Labour
                                                       + Direct Expenses + Factory Overhead etc.
-    Closing Stock

Capital employed = Owner’s equity + Long-term liabilities
                             = Net Working Capital + Non-current assets.

The Capital turnover ratio in the above case is 3 times. That means every rupee of capital employed generates a sale of Rs 3.

Relevance of Capital Turnover Ratio. This ratio measures the efficiency of a firm in managing and utilizing its funds or assets. It indicates the velocity of the utilization of long-term funds. It shown whether or not optimum capital is invested to fiancé the turnover. The ratio differs from business to business. It is, for example, high in retail trade and low in capital intensive industries. Higher the ratio, the better its is. A high ratio is a mark f brisk activity or under-investment and vice-versa.

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