How do you calculate Net Current Assets Turnover?

Finance ManagementBanking & FinanceGrowth & Empowerment

What is Net Current Assets Turnover Ratio?

The net current assets turnover ratio expresses the ability of a company’s working capital in promoting the sales of the company. Net current assets are also known as working capital. The ratio shows to what extent the day-to-day expenses fuel the net sales of a company. In other words, the ratio is an expression of net sales that occur per unit of net current assets.

$$\mathrm{\mathrm{Net\: current\: assets\: turnover \:ratio}\:=\:\frac{\mathrm{Net\: Sales}}{\mathrm{Net\: Current\: Assets}}}$$

Here,

Net Current Assets = Current assets - Current Liabilities

Net sales - Total Sales - Total returns (Inwards)

Calculation of Net Current Assets Turnover

By following the mentioned steps, it is easy to calculate the value of net current assets turnover −

  • Locate the net current assets or working capital on the statement of changes in the financial position of a company. Sometimes they may be mentioned as net sales while in some other cases, they may be mentioned as working capital.

  • Locate net current assets and net current liabilities of the firm if net current assets are not represented. You can calculate net current assets by deducting current liabilities from current assets.

  • Collect the net sales figure for the year you want to calculate net current asset turnover for.

  • Divide net sales by net current assets to get the ratio.

Example 

Suppose company ABC has a working capital of Rs 50 Crores, whereas its net sales for a year is Rs 200 Crores.

What will be ABC’s net current asset turnover?

We can easily see that the net sales and net current working capital is mentioned in this case. Therefore, we may calculate the value of Net Current Assets Turnover.

$$\mathrm{\mathrm{ABC'\:s\:Net\: Current\: Assets\: Turnover}\:=\:\frac{\mathrm{Rs\: 200\: Crores}}{\mathrm{Rs\: 50\: Crores}}\:=\:4}$$

So, for each rupee invested, ABC earns a revenue of Rs 4 from its sales.

Characteristics of Net Current Assets Turnover Calculation

  • Denominator is More Important Than Numerator

    In the calculation of net current assets turnover, the denominator is more important than the numerator. The current assets part is in the denominator which must be the focus of the management to make it more efficient. When the current asset figure goes up, it means that the company is utilizing more of its assets to convert them to sales. So, it is an important item that must be controlled by the management.

  • Insight into Cash Management

    The denominator also offers an insight into the cash management factor by the company. As is obvious, a greater value of the denominator means that a higher value of cash has been used in the management of the project. This is a good sign because it shows that more money has been used in financing the projects and no money is lying idle with the company.

  • Ratio is Related to Changes in Sales

    The numerator of the ratio is related to the changes in sales due to the changes in fixed assets. Therefore, the management should invest little time to manage the sales process. Although operational efficiency is required to have a positive change in sales, it is of less importance when considered from the point of view of the assets. So, the numerator part is less important than the denominator part in the ratio.

Conclusion

The calculation of net current assets turnover is similar to the total assets turnover ratio. The difference lies in the fact that in the case of the former, the current assets are considered while in the case of the latter, total assets turnover is considered. However, for a better decision-making process, these ratios should be used simultaneously. No one ratio is self-sufficient in nature while measuring the performance of a company.

raja
Published on 12-May-2022 07:11:37
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