This ratio indicates the efficiency or inefficiency in the utilization of working capital in making sales. The term net working capital means current assets minus current liabilities.
Significance and Objective. A high working capital turnover ratio shows the efficient utilization of Working capital in generating sales.
A low ratio, on the other hand, may indicate excess of net working capital. Working capital turnover ratio thus shows whether working capital is efficiently utilized or not. This ratio is considered better than Stock Turnover Ratio because it shows the utilisation of the entire working capital whereas stock turnover ratio indicates only the turnover of inventories which is only a part of the working capital.
Significance and Objectives.This ratio exhibits the performance with which capital employed in a business is utilized.
A high capital turnover ratio indicates the chance of greater profit plus a low capital turnover ratio can be a sign of insufficient sales and chance of lower profits.
Creditors Turnover Ratio
This ratio also known as Payables Turnover Ratio, measures the relationship between credit purchases and average accounts payable.
Turnover ratios are employed to indicate the performance with which assets and sources of the company are being utilized. These ratios are called turnover ratios due to the fact they indicate the pace with which assets are getting converted or turned over in to sales. These ratios 1 therefore, express the relationship between various assets and sales. A higher turnover ratio usually indicates better usage of capital resources that in turn has a favorable impact on the profitability of the company.
Types of Turnover Ratios
1. Inventory turnover ratio
2. Debtors turnover ratio
3. Fixed assets turnover ratio
4. Working capital turnover ratio
5. Capital turnover ratio
6. Creditors turnover ratio