Current Assets Turnover Ratio: Definition & Interpretation

What is Current Assets Turnover Ratio?

Current assets turnover ratio is efficiency ratio that shows how efficiently management utilizes its current assets to generate sales. The proportion of net sales generated for per rupee invested in current assets.                                                                           
Basically, after calculating the ratio a investor want to able to know how well a business is using its equipments. This ratio is more useful in manufacturing industry where companies have large and costly equipment purchases.

Current Assets Turnover Ratio Formula

The current assets turnover ratio formula is calculated by net sales by total current assets,

         Current assets turnover ratio = ( Net Sales/ Total Current Assets)

Where, current assets are short term assets like short term investment, Bills Receivable, cash & cash equivalents etc.

Net sales is also know as revenue. Net sales is reported on the income statement.

Current Assets Turnover Ratio Example

Let, it is ABC company. Here is some information about the ABC company,
Balance sheet of ABC company as on 31.03.2019

Non current assets         Rs 1600000
Current assets                 Rs   500000
Non current liabilities   Rs 1000000
Current liabilities           Rs   400000
Share capital                    Rs   700000

Income statement for the year ended on 31.03.2019

Revenue               Rs 2000000
Gross profit          Rs 1000000
EBITDA                 Rs    100000
EBIT                      RS      95000
EBT                        Rs      97000
Net Income          Rs      95000

        Now, Current assets turnover ratio = (2000000/500000) = 4 times 
 It means ABC company is able to generate a sale of Rs 4 while using current assets worth Rs 1.

Current Assets Turnover Ratio Interpretation 

Current assets turnover ratio tells us how effectively the company uses it's short term assets. This ratio is very low capital intensive in sectors such as automobile companies, iron and steel industries etc. This ratio is mostly used by capital intensive sectors such as manufacturing industry etc.
higher ratio indicates the efficiency of the management regarding utilization of current assets for increased sales and lower amount invested in current assets generates more sales.
A lower ratio generally reflects inefficiency in use of the current assets for generating sales. In recession or difficult situation such as overestimated the demand of their products, bottlenecks in production, when no one wants buy the products and strike off etc this ratio will be gone down but normally it can be for a while and can change after sometime.
There is no ideal figure to identify whether or not a company is efficiently generated sales. To judge overall efficiency of the company and better to find out a tend of past five years. And it is more useful when compare companies within same sector. Higher the current assets ratio is better and better is assets management of the company.

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