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. 2. 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). 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.

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 = Turnover

Net Credit Purchases 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 credi t 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

Inventory turnover is the ratio of 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 statement of 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 sheets at 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 inventory at 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

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 accountsreceivable balance 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 statement of 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 the balance sheets of 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 of cash collection on 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

Definition of 'Fixed-Asset Turnover Ratio'

A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has 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 Turnover Ratio'

This ratio is often used as a measure in manufacturing industries, where major purchases are made for PP&E to help increase output. When companies make these large purchases, prudent investors watch this ratio in following years to see how effective the investment in the fixed assets was.

This ratio is similar to thedebtors turnover ratio. It compares creditors with the totalcredit purchases. It signifies the credit period enjoyed by the firm in paying creditors. Accounts payable include 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 its creditors. A high creditorsturnover ratioor alower creditperiod ratio signifies that the creditors 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 not taking the full advantage of credit facilities allowed by the creditors.

Read more athttp://accounting4management.com/creditors_payable_turnover_ratio.htm#750AiM 6u1KHcrPb5.99

Definition of 'Accounts Payable Turnover Ratio'

A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period.

Investopedia explains 'Accounts Payable Turnover Ratio'

The measure shows investors how many times per period the company pays its average payable amount. For example, if the company makes $100 million in purchases from suppliers in a year and at any given point holds an average accounts payable of $20 million, the accounts payable turnover ratio for the period is 5 ($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 the turnover ratio is increasing, which means that the company is paying of suppliers at a faster rate.

A business organisation has to pay creditors if it buys goods on credit. Any new creditor will give us the goods on credit if he knows that we pay our creditors' bill within short period of time. So, for knowing this time period, both parties calculate creditor turnover ratio. We will calculate this because if 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 of debtor turnover ratio but we show net credit annual purchase and average trade creditors instead of net credit annual sales and average trade debtors. If we have not the information of net credit purchase, we can take total purchase as numerator. Like this, if we have no information of opening balance of creditors, we can take closing balance of creditors. We can calculate average trade creditors by taking the average of opening balance 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 of creditors, if all other information is given.

Working capital turnover ratio is computed by dividing the cost of goods sold by net working capital. It represents 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 goods sold figure is not available or cannot be computed from the available information, the total net sales can be used as numerator. Net working capital is equal to current assets minus current liabilities. This information is available from the 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 31 December, 2012 are given below:
Cost of goods sold Accounts payable Inventory Accounts receivables Notes receivables Cash $ 300,000 60,000 40,000 50,000 10,000 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 its working capital 5 times in 2012.

Interpretation:
Generally, a high working capital turnover ratio is better. A low ratio indicates inefficient utilization of working capital. The ratio should be carefully interpreted because a very high ratio may be a sign of insufficient working capital.

Working Capital Turnover Ratio

Description: The working capital turnover ratio measures how well a company is utilizing itsworking capital to 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 shortterm assets and liabilities to 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 the accounts payable component 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

Description: The fixed asset turnover ratio is the ratio of net sales to net fixed 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 generating revenues. 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: Subtract accumulated depreciation from 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 include intangible assets in 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 the double 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

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

Capital turnover
Calculated by dividing annual sales by average stockholder equity (net worth). The ratio indicates how much a companycould grow its current capital investment level. Low capital turnover generally corresponds to high profit margins.
Copyright 2012, Campbell R. Harvey. All Rights Reserved.

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Capital Turnover
A ratio of how effectively a publicly-traded company manages the capital invested in it to produce revenues. It is calculated by taking the total of the company's annual sales and dividing it by the average stockholder equity, which is the average amount of money invested in the company. A high ratio indicates that the company is using its capital well, while a low ratio indicates the opposite. It is also called equity turnover.

Farlex Financial Dictionary. 2012 Farlex, Inc. All Rights Reserved

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capital turnover
A measure indicating how effectively investment capital is used to produce revenues. Capital turnover is expressed as a ratio of annual sales to invested capital.

nventory conversion period reports us about the average time to convert our total inventory into sales. It is relationship between total days in year and inventory turnover ratio. In other words, it measures the length of time on average between the acquisition and sale of merchandise. We can calculate 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 of cash 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 adding average 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.

nventory Turnover Ratio interpretation

Inventory 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. Its purpose is to measure the liquidity of the inventory. Inventory Turnover Ratio is figured as "turnover times". Average inventory should be used for inventory 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 poor liquidity, possible overstocking, and obsolescence, but it may also reflect a planned inventory buildup in the case of material shortages or in anticipation of rapidly rising prices. A high inventory turnover ratio implies either strong sales or ineffective buying (the company buys too often in small quantities, therefore the buying price is higher).A high inventory turnover ratio can indicate 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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