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Working capital is a measure of liquidity of a business. It equals current assets minus current
liabilities.
Formula
Working Capital = Current Assets Current Liabilities
Current assets are assets that are expected to be realized in a year or within one operating cycle.
Current liabilities are obligations that are required to be paid within a year or within one operating
cycle.
Analysis
If current assets of a business at the point in time are more than its current liabilities the working
capital is positive, and this tells that the company is not expected to suffer from liquidity crunch in
near future. However, if current assets are less than current liabilities the working capital is negative,
and this communicates that the business may not be able to pay off its current liabilities when due.
Examples
1. Company A has current assets of USD 5 million and current liabilities of USD 3 million. Its working
capital is USD 2 million (USD 5 million minus USD 3 million).
2. Company B has current ratio of 1.5 and its current liabilities are USD 80 million. Since current ratio
is equal to current assets minus current liabilities we can calculate current assets by multiplying
current ratio with current liabilities (USD 80 million*1.5=USD 120 million). Current liabilities are
USD 80 million hence working capital is USD 120 million minus USD 80 million which equals USD
40 million.
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counts Payable Turnover Ratio
Accounts payable turnover is the ratio of net credit purchases of a business to its average accounts
payable during the period. It measures short term liquidity of business since it shows how many times
during a period, an amount equal to average accounts payable is paid to suppliers by a business.
Formula
Accounts payable turnover is usually calculated as:
Payables=
Net Credit Purchases
Turnover Average Accounts Payable
To calculate average accounts payable, divide the sum of accounts payable at the beginning and at
the end of the period by 2. Net credit purchases figure in the denominator is not easily discoverable
since such information is not usually available in financial statements. It is to be search for in the
annual report of the company. Sometimes cost of goods sold is used in the denominator instead of
credit purchases.
Analysis
Accounts payable turnover is a measure of short-term liquidity. A higher value indicates that the
business was able to repay its suppliers quickly. Thus higher value of accounts payable turnover is
favorable. This ratio can be of great importance to suppliers since they are interested in getting paid
early for their supplies. Other things equal, a supplier should prefer to sell to a company with higher
accounts payable turnover ratio.
Examples
Example 1:Company sold goods having invoice value of $243,200 on credit during the year ended
Dec 31, 2010. Its customers returned goods invoice at $5,900. Accounts payable of the company on
Jan 1, 2010 and Dec 31, 2011 were $23,000 and $34,900 respectively. Calculate its accounts payable
ratio.
Solution
Net Credit Sales = $243,200 $5,900 = $237,300
Average Accounts Payable = ( $23,000 + $34,900 ) / 2 = $28,950
Accounts Payable Turnover Ratio = $237,300 / $28,950 8.2
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Inventory turnover is theratioof cost of goods sold by a business to its average inventory during a
given accounting period. It is an activity ratio measuring the number of times per period, a business
sells and replaces its entire batch of inventory again.
Formula
Inventory turnover ratio is calculated using the following formula:
Inventory Turnover =Cost of Goods Sold
Average Inventory
Cost of goods sold figure is obtained from theincome statementof a business whereas average
inventory is calculated as the sum of the inventory at the beginning and at the end of the period
divided by 2. The values of beginning and ending inventory are obtained from the balance sheetsat
the start and at the end of the accounting period.
Analysis
Inventory turnover ratio is used to measure the inventory management efficiency of a business. In
general, a higher value of inventory turnover indicates better performance and lower value means
inefficiency in controlling inventory levels. A lower inventory turnover ratio may be an indication of
over-stocking which may pose risk of obsolescence and increased inventory holding costs. However, a
very high value of this ratio may be accompanied by loss of sales due to inventory shortage.
Inventory turnover is different for different industries. Businesses which trade perishable goods have
very higher turnover compared to those dealing in durables. Hence a comparison would only be fair if
made between businesses of same industry.
Examples
Example 1: During the year ended December 31, 2010, Loud Corporation sold goods costing
$324,000. Its average stock of goods during the same period was $23,432. Calculate the company's
inventory turnover ratio.
Solution
Inventory Turnover Ratio = $324,000 $23,432 13.83
Example 2: Cost of goods sold of a retail business during a year was $84,270 and its inventoryat the
beginning and at the ending of the year was $9,865 and $11,650 respectively. Calculate the inventory
turnover ratio of the business from the given information.
Solution
Average Inventory = ($9,865 + $11,650) 2 = $10,757.5
Inventory Turnover = $84,270 $10,757.5 7.83
http://accountingexplained.com/financial/ratios/http://accountingexplained.com/financial/ratios/http://accountingexplained.com/financial/ratios/http://accountingexplained.com/financial/statements/income-statementhttp://accountingexplained.com/financial/statements/income-statementhttp://accountingexplained.com/financial/statements/balance-sheethttp://accountingexplained.com/financial/statements/balance-sheethttp://accountingexplained.com/financial/statements/balance-sheethttp://accountingexplained.com/financial/inventories/http://accountingexplained.com/financial/inventories/http://accountingexplained.com/financial/inventories/http://accountingexplained.com/financial/inventories/http://accountingexplained.com/financial/statements/balance-sheethttp://accountingexplained.com/financial/statements/income-statementhttp://accountingexplained.com/financial/ratios/ -
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Accounts receivable turnover is the ratio of net credit sales of a business to its average accounts
receivable during a given period, usually a year. It is an activity ratio which estimates the number of
times a business collects its average accountsreceivablebalance during a period.
Formula
Accounts receivable turnover is calculated using the following formula:
Receivables=
Net Credit Sales
Turnover Average Accounts Receivable
We can obtain the net credit sales figure from theincome statementof a company. Average accounts
receivable figure may be calculated simply by dividing the sum of beginning and ending accounts
receivable by 2. The beginning and ending accounts receivable can be found on thebalance sheetsof
the first and the last day of the accounting period.
Accounts receivable turnover is usually calculated on annual basis, however for the purpose of
creating trends, it is more meaningful to calculate it on monthly or quarterly basis.
Analysis
Accounts receivable turnover measures the efficiency of a business in collecting its credit sales.
Generally a high value of accounts receivable turnover is favorable and lower figure may indicate
inefficiency in collecting outstanding sales. Increase in accounts receivable turnover overtime
generally indicates improvement in the process ofcash collectionon credit sales.
However, a normal level of receivables turnover is different for different industries. Also, very high
values of this ratio may not be favourable, if achieved by extremely strict credit terms since such
policies may repel potential buyers.
Examples
Example 1: Net credit sales of Company A during the year ended June 30, 2010 were $644,790. Its
accounts receivable at July 1, 2009 and June 30, 2010 were $43,300 and $51,730 respectively.
Calculate the receivables turnover ratio.
Solution
Average Accounts Receivable = ($43,300 + $51,730) 2 = $47,515
Receivables Turnover Ratio = $644,790 $47,515 13.57
Example 2: Total sales of Company B during the year ended December 31, 2010 were $984,000.Customers returned goods invoiced at $31,400 during the year. Average accounts receivable during
the period were $23,880. Calculate accounts receivable turnover ratio.
Solution
Net Credit Sales = $984,000 $31,400 = $952,600
Receivables Turnover = $952,600 $23,880 39.89
http://accountingexplained.com/financial/receivables/http://accountingexplained.com/financial/receivables/http://accountingexplained.com/financial/statements/income-statementhttp://accountingexplained.com/financial/statements/income-statementhttp://accountingexplained.com/financial/statements/income-statementhttp://accountingexplained.com/financial/statements/balance-sheethttp://accountingexplained.com/financial/statements/balance-sheethttp://accountingexplained.com/financial/statements/balance-sheethttp://accountingexplained.com/managerial/master-budget/cash-collectionshttp://accountingexplained.com/managerial/master-budget/cash-collectionshttp://accountingexplained.com/managerial/master-budget/cash-collectionshttp://accountingexplained.com/managerial/master-budget/cash-collectionshttp://accountingexplained.com/financial/statements/balance-sheethttp://accountingexplained.com/financial/statements/income-statementhttp://accountingexplained.com/financial/receivables/ -
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Definition of 'Fixed-Asset TurnoverRatio'A financial ratio of net sales to fixed assets. The
fixed-asset turnover ratio measures a company'sability to generate net sales from fixed-asset
investments - specifically property, plant and
equipment (PP&E) - net of depreciation. A higherfixed-asset turnover ratio shows that the companyhas been more effective in using the investment in
fixed assets to generate revenues.
The fixed-asset turnover ratio is calculated as:
Investopedia explains'Fixed-Asset TurnoverRatio'This ratio is often used as ameasure in manufacturing
industries, where major purchasesare made for PP&E to help increase
output. When companies make
these large purchases, prudent
investors watch this ratio infollowing years to see how effective
the investment in the fixed assetswas.
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This ratio is similar to thedebtors turnover ratio. It compares creditors with the totalcreditpurchases.
It signifies the credit period enjoyed by the firm in paying creditors. Accounts payableinclude both sundry creditors and bills payable. Same asdebtors turnover
ratio,creditorsturnover ratiocan be calculated in two forms, creditors turnover ratio and
average payment period.
Formula:
Following formula is used to calculate creditorsturnover ratio:
CreditorsTurnover Ratio=Credit Purchase/Average TradeCreditors
Average Payment Period:
Average payment period ratiogives the average credit period enjoyed from the creditors.It can be calculated using the following formula:
Average Payment Period =Trade Creditors/ Average DailyCredit Purchase
Average Daily Credit Purchase= Credit Purchase / No. of working days in a year
Or
Average Payment Period = (Trade Creditors No. of Working Days) / NetCredit Purchase
(In case information about credit purchase is not available total purchases may be assumed
to be credit purchase.)
Significance of the Ratio:
The average payment period ratio represents the number of days by the firm to pay itscreditors. A high creditorsturnover ratioor alower creditperiod ratio signifies that thecreditors are being paid promptly. This situation enhances the credit worthiness of the
company. However a very favorable ratio to this effect also shows that the business is nottaking the full advantage of credit facilities allowed by the creditors.
Read moreathttp://accounting4management.com/creditors_payable_turnover_ratio.htm#750AiM
6u1KHcrPb5.99
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Definition of 'Accounts Payable TurnoverRatio'A short-term liquidity measure used to quantify the rate
at which a company pays off its suppliers. Accountspayable turnover ratio is calculated by taking the total
purchases made from suppliers and dividing it by theaverage accounts payable amount during the sameperiod.
Investopedia explains'Accounts PayableTurnover Ratio'The measure shows investorshow many times per period
the company pays its averagepayable amount. For example,if the company makes $100
million in purchases fromsuppliers in a year and at anygiven point holds an average
accounts payable of $20million, the accounts payableturnover ratio for the period is5 ($100 million/$20 million). If
the turnover ratio is falling
from one period to another,this is a sign that the company
is taking longer to pay off its
suppliers than it was before.The opposite is true when theturnover ratio is increasing,
which means that the
company is paying of suppliers
at a faster rate.
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A business organisation has to pay creditors if it buys goods on credit. Any new creditor will give usthe goods on credit if he knows that we pay our creditors' bill within short period of time. So, forknowing this time period, both parties calculate creditor turnover ratio. We will calculate this becauseif our time period is more than normally standard period, we will try to decrease it. On the other side,
new creditor will take the decision on this ratio whether goods on credit will be given to us or not.
We calculate creditor turnover ratio just like calculating ofdebtor turnover ratiobut we show netcredit annual purchase and average trade creditors instead of net credit annual sales and averagetrade debtors. If we have not the information of net credit purchase, we can take total purchase asnumerator. Like this, if we have no information of opening balance of creditors, we can take closingbalance of creditors. We can calculate average trade creditors by taking the average of openingbalance and closing balance of creditors. Following is the formula
Creditor or Payable Turnover Ratio
= Net Credit Annual Purchase / Average Trade Creditors
This ratio can be used for calculating Average Payment period.
Example
Total purchases = Rs. 400,000
Cash purchases = Rs. 50000
purchase return = Rs. 20000
Creditors at end = Rs. 60000
Bills payable at end = Rs. 20000
Reserve for discount on creditors = Rs. 5000
Creditor Turnover Ratio = Annual Net Credit Purchase / Average Trade Creditors
= 400000 - 50000 - 20000 / 60000+20000 = 330000 / 80000 = 4.13 times
Interpretation of Creditor Turnover Ratio
Higher creditor turnover ratio is good because it will decrease the average payment period.
In the question, if we have given the information of creditor turnover ratio and other information, we
can calculate one missing information. For example, in following video, we can find opening balance ofcreditors, if all other information is given.
http://www.svtuition.org/2011/11/debtor-turnover-ratio.htmlhttp://www.svtuition.org/2011/11/debtor-turnover-ratio.htmlhttp://www.svtuition.org/2011/11/debtor-turnover-ratio.htmlhttp://2.bp.blogspot.com/-K44_VQZZ4HI/Tsx6sykZxyI/AAAAAAAAHFg/i3wrDY5czFA/s1600/20px-Crystal_yast_partitioner.pnghttp://2.bp.blogspot.com/-K44_VQZZ4HI/Tsx6sykZxyI/AAAAAAAAHFg/i3wrDY5czFA/s1600/20px-Crystal_yast_partitioner.pnghttp://2.bp.blogspot.com/-K44_VQZZ4HI/Tsx6sykZxyI/AAAAAAAAHFg/i3wrDY5czFA/s1600/20px-Crystal_yast_partitioner.pnghttp://2.bp.blogspot.com/-K44_VQZZ4HI/Tsx6sykZxyI/AAAAAAAAHFg/i3wrDY5czFA/s1600/20px-Crystal_yast_partitioner.pnghttp://www.svtuition.org/2011/11/debtor-turnover-ratio.html -
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Working capital turnover ratio is computed by dividing the cost of goods sold by net working capital. Itrepresents how many times the working capital has been turned over during the period.
Formula:
The formula consists of two components cost of goods sold and net working capital. If the cost of goodssold figure is not available or cannot be computed from the available information, the total net sales canbe used as numerator.Net working capital is equal to current assets minus current liabilities. This information is available fromthe balance sheet. For more explanation consider the following example:
Example:Exide company sells batteries that are used in vehicles. The current assets and current liabilities as on 31December, 2012 are given below:Cost of goods sold $ 300,000
Accounts payable 60,000
Inventory 40,000
Accounts receivables 50,000
Notes receivables 10,000
Cash 20,000
Required:Compute working capital turnover ratio from the above information.
Solution:
= 300,000 / 60,000= 5 times
The working capital turnover ratio of Exide company is 5. It means the company has turned over itsworking capital 5 times in 2012.
Interpretation:Generally, a high working capital turnover ratio is better. A low ratio indicates inefficient utilization ofworking capital. The ratio should be carefully interpreted because a very high ratio may be a sign ofinsufficient working capital.
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Working Capital Turnover Ratio
Description: The working capital turnover ratio measures how well a company is utilizing itsworking
capitalto support a given level of sales. Working capital is current assets minus current liabilities. A high
turnover ratio indicates that management is being extremely efficient in using a firm's short-
termassetsandliabilitiesto support sales. Conversely, a low ratio indicates that a business is investing in
too many accounts receivable and inventory assets to support its sales, which could eventually lead to an
excessive amount of bad debts and obsolete inventory.
Formula: To calculate the ratio, divide net sales by working capital (which is current assets minus current
liabilities). The calculation is usually made on an annual basis, and uses the average working capital during
that period. The calculation is:
Net sales
(Beginning working capital + Ending working capital) / 2
Example: ABC Company has $12,000,000 of net sales over the past twelve months, and average working
capital during that period of $2,000,000. The calculation of its working capital turnover ratio is:
$12,000,000 Net sales
$2,000,000 Average working capital
= 6.0 Working capital turnover ratio
Cautions: An extremely high working capital turnover ratio can indicate that a company does not have
enough capital to support it sales growth; collapse of the company may be imminent. This is a particularly
strong indicator when theaccounts payablecomponent of working capital is very high, since it indicates that
management cannot pay its bills as they come due for payment.
An excessively high turnover ratio can be spotted by comparing the ratio for a particular business to those
reported elsewhere in its industry, to see if the business is reporting outlier results.
Similar Terms
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Description: The fixed asset turnover ratio is the ratio of net sales to netfixed assets(also known as
property, plant, and equipment). A high ratio indicates that a company is doing an effective job of
generating sales with a relatively small amount of fixed assets. Conversely, if the ratio is declining over
time, the company has either overinvested in fixed assets or it needs to issue new products to revive its
sales. Another possible effect is for a company to make a large investment in fixed assets, with a time delay
of several months to a year before the new assets start generatingrevenues.
The concept of the fixed asset ratio is most useful to an outside observer, who wants to know how well a
business is employing its assets to generate sales.
Formula: Subtractaccumulated depreciationfrom gross fixed assets, and divide into net annual sales. It
may be necessary to obtain an average fixed asset figure, if the amount varies significantly over time. Do
not includeintangible assetsin the denominator, since it can skew the results. The formula is:
Net annual sales
Gross fixed asset - Accumulated depreciation
Example: ABC Company has gross fixed assets of $5,000,000 and accumulated depreciation of $2,000,000.
Sales over the last 12 months totaled $9,000,000. The calculation of ABC's fixed asset turnover ratio is:
$9,000,000 Net sales
$5,000,000 Gross fixed assets - $2,000,000 Accumulated depreciation
= 3.0 Turnover per year
Cautions: The fixed asset turnover ratio is most useful in "heavy industry," such as automobile
manufacturing, where a large capital investment is required in order to do business. In other industries,
such as software development, the fixed asset investment is so meager that the ratio is not of much use.
A potential problem with this ratio may arise if a company uses accelerated depreciation, such as thedouble
declining balance method, since this artificially reduces the amount of net fixed assets in the denominator of
the calculation, and makes turnover appear higher than it really should be.
Finally, ongoing depreciation will inevitably reduce the amount of the denominator, so the turnover ratio will
rise over time, unless the company is investing an equivalent amount in new fixed assets to replace older
ones. Thus, a business whose management team deliberately decides not to re-invest in its fixed assets will
experience a gradual improvement in its fixed asset ratio for a period of time, after which its decrepit asset
base will be unable to manufacture goods in an efficient manner.
Similar Concepts
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The fixed asset turnover ratio is similar to the tangible asset ratio, which does not include the net cost of
intangible assets in the denominator. The ratio is also sometimes known as the f
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Capital turnoverCalculated by dividing annualsalesby averagestockholderequity(net worth). The ratio indicates howmuch acompanycould grow its currentcapital investmentlevel. Lowcapital turnovergenerallycorresponds to highprofit margins.
Copyright 2012,Campbell R. Harvey.All Rights Reserved.
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Capital Turnover
A ratio of how effectively apublicly-traded companymanages thecapitalinvestedin it toproducerevenues. It is calculated by taking the total of the company's annual salesand dividing it by the
averagestockholder equity, which is the average amount ofmoneyinvested in the company. A high ratioindicates that the company is using its capital well, while a low ratio indicates the opposite. It is also calledequity turnover.
Farlex Financial Dictionary. 2012 Farlex, Inc. All Rights Reserved
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capital turnoverA measure indicating how effectively investment capital is used to produce revenues. Capital turnover isexpressed as a ratio of annual sales to invested capital.
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nventory conversion period reports us about the average time to convert our total inventory intosales. It is relationship between total days in year andinventory turnover ratio. In other words, itmeasures the length of time on average between the acquisition and sale of merchandise. We cancalculate it with following formula.
For example, inventory turnover ratio is 10 times of average stock at cost. Its inventory conversion
period will be
= 365/ 10 = 37 days. It means, the inventory has been disposed off or sold on an average in 37
days.
Interpretation of Inventory Conversion Period
1. Less inventory conversion period is better because more fastly, we will convert our inventory into
sales, there will be less chance of obsolescence and paying of over-stocking cost.
2. Inventory conversion period is the part ofcash conversion cycle. If this period is very high, it will
increase the time to complete the cash conversion cycle. It means, there will be more liquidity risk in
that level of inventory.
3. After addingaverage collection period and deducting average payment period, we can take good
decision relating to inventory level. Following example will explain its importance in simple way.
http://www.svtuition.org/2011/10/inventory-turnover-ratio.htmlhttp://www.svtuition.org/2011/10/inventory-turnover-ratio.htmlhttp://www.svtuition.org/2011/10/inventory-turnover-ratio.htmlhttp://en.wikipedia.org/wiki/Cash_conversion_cyclehttp://en.wikipedia.org/wiki/Cash_conversion_cyclehttp://en.wikipedia.org/wiki/Cash_conversion_cyclehttp://www.svtuition.org/2008/11/importance-of-calculating-average.htmlhttp://www.svtuition.org/2008/11/importance-of-calculating-average.htmlhttp://4.bp.blogspot.com/-8zjditg_F20/Tr0a5kIxAPI/AAAAAAAAHDA/gjpbhdBv6CU/s1600/pics+inventory+turnover+ratio.PNGhttp://www.svtuition.org/2008/11/importance-of-calculating-average.htmlhttp://en.wikipedia.org/wiki/Cash_conversion_cyclehttp://www.svtuition.org/2011/10/inventory-turnover-ratio.html -
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nventory Turnover Ratio interpretationInventory Turnover Ratio is one of the efficiency ratios and measures the number of times, on
average, the inventory is sold and replaced during the fiscal year. Inventory Turnover Ratio formula is:
Inventory Turnover Ratio measures company's efficiency in turning its inventory into sales. Itspurpose is to measure the liquidity of the inventory.
Inventory Turnover Ratio is figured as "turnover times". Average inventory should be used forinventory level to minimize the effect of seasonality.
This ratio should be compared against industry averages.A low inventory turnover ratio is a signal of inefficiency, since inventory usually has a rate of
return of zero. It also implies either poor sales or excess inventory. A low turnover rate can indicate poorliquidity, possible overstocking, and obsolescence, but it may also reflect a planned inventory buildup inthe case of material shortages or in anticipation of rapidly rising prices.
A high inventory turnover ratio implies either strong sales or ineffective buying (the companybuys too often in small quantities, therefore the buying price is higher).A high inventory turnover ratio canindicate better liquidity, but it can also indicate a shortage or inadequate inventory levels, which may lead
to a loss in business.High inventory levels are usual unhealthy because they represent an investment with a rate of
return of zero. It also opens the company up to trouble if the prices begin to fall.A good rule of thumb is that if inventory turnover ratio multiply by gross profit margin (in
percentage) is 100 percent or higher, then the average inventory is not too high.
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