Feb 7, 2023
Capital Turnover Ratio
What is Capital Turnover Ratio
The Capital Turnover Ratio is a financial metric used to measure how effectively a company is using its capital to generate sales or revenue. The ratio is calculated by dividing a company's total sales or revenue by its total capital. This ratio is used to analyze a company's ability to generate sales from its capital and is often used by investors to compare different companies and determine which is more efficient.
Why Capital Turnover Ratio is Important
The Capital Turnover Ratio is an important financial metric for investors, as it is one of the most commonly used metrics for evaluating the efficiency of a company's capital. A higher ratio indicates that a company is generating more sales or revenue from its capital, while a lower ratio indicates that the company is not utilizing its capital as effectively.
How Capital Turnover Ratio is Calculated
The Capital Turnover Ratio is calculated by dividing the total sales of the company by its total capital. The formula for the Capital Turnover Ratio is:
Capital Turnover Ratio = Total Sales / Total Capital
For example, if a software company has total sales of $1,000,000 and total capital of $500,000, then the Capital Turnover Ratio would be 2.0. This indicates that the company is generating $2 in sales for every dollar of capital invested.
How to Improve Capital Turnover Ratio
There are several ways that a company can improve its Capital Turnover Ratio. These include reducing the amount of capital that the company has invested in its operations, increasing the efficiency of its operations, and reducing the amount of money that the company has tied up in inventory or other assets.
Why Investors Value Low Capital Turnover Ratio
Investors value companies with high Capital Turnover Ratios because it indicates that the company is efficiently utilizing its capital to generate sales and profits. Investors are also attracted to companies that are able to generate more sales for each dollar of capital invested, as this indicates that the company is able to generate more profits.
How Capital Turnover Ratio Relates to Other Financial Metrics
The Capital Turnover Ratio is related to other financial metrics, such as the Return on Capital Employed (ROCE) and the Return on Equity (ROE). These metrics measure the performance of a company based on its ability to generate returns from its capital. A higher Capital Turnover Ratio indicates that a company is more efficient at generating returns from its capital, while a lower Capital Turnover Ratio indicates that the company is not utilizing its capital as effectively.
Example of Calculating Capital Turnover Ratio on Software Companies
Below are examples of how to calculate the Capital Turnover Ratio of two well-known software companies in the U.S.
Microsoft:
Total Sales: $110 billion
Total Capital: $45 billion
Capital Turnover Ratio: 2.44 ($110 billion/$45 billion)
Adobe:
Total Sales: $11 billion
Total Capital: $2.7 billion
Capital Turnover Ratio: 4.07 ($11 billion/$2.7 billion)
Sources
Investopedia. (n.d.). Capital Turnover Ratio. Retrieved April 12, 2021, from https://www.investopedia.com/terms/c/capital-turnover-ratio.asp
Ahmed, M. (2020, December 10). Capital Turnover Ratio: Definition, Formula, Analysis & Examples. Retrieved April 12, 2021, from https://corporatefinanceinstitute.com/resources/knowledge/finance/capital-turnover-ratio/
Palioura, V. (2020, August 27). What is the Capital Turnover Ratio? Retrieved April 12, 2021, from https://www.thebalance.com/what-is-the-capital-turnover-ratio-4582935
Capital Turnover Ratio
What is Capital Turnover Ratio
The Capital Turnover Ratio is a financial metric used to measure how effectively a company is using its capital to generate sales or revenue. The ratio is calculated by dividing a company's total sales or revenue by its total capital. This ratio is used to analyze a company's ability to generate sales from its capital and is often used by investors to compare different companies and determine which is more efficient.
Why Capital Turnover Ratio is Important
The Capital Turnover Ratio is an important financial metric for investors, as it is one of the most commonly used metrics for evaluating the efficiency of a company's capital. A higher ratio indicates that a company is generating more sales or revenue from its capital, while a lower ratio indicates that the company is not utilizing its capital as effectively.
How Capital Turnover Ratio is Calculated
The Capital Turnover Ratio is calculated by dividing the total sales of the company by its total capital. The formula for the Capital Turnover Ratio is:
Capital Turnover Ratio = Total Sales / Total Capital
For example, if a software company has total sales of $1,000,000 and total capital of $500,000, then the Capital Turnover Ratio would be 2.0. This indicates that the company is generating $2 in sales for every dollar of capital invested.
How to Improve Capital Turnover Ratio
There are several ways that a company can improve its Capital Turnover Ratio. These include reducing the amount of capital that the company has invested in its operations, increasing the efficiency of its operations, and reducing the amount of money that the company has tied up in inventory or other assets.
Why Investors Value Low Capital Turnover Ratio
Investors value companies with high Capital Turnover Ratios because it indicates that the company is efficiently utilizing its capital to generate sales and profits. Investors are also attracted to companies that are able to generate more sales for each dollar of capital invested, as this indicates that the company is able to generate more profits.
How Capital Turnover Ratio Relates to Other Financial Metrics
The Capital Turnover Ratio is related to other financial metrics, such as the Return on Capital Employed (ROCE) and the Return on Equity (ROE). These metrics measure the performance of a company based on its ability to generate returns from its capital. A higher Capital Turnover Ratio indicates that a company is more efficient at generating returns from its capital, while a lower Capital Turnover Ratio indicates that the company is not utilizing its capital as effectively.
Example of Calculating Capital Turnover Ratio on Software Companies
Below are examples of how to calculate the Capital Turnover Ratio of two well-known software companies in the U.S.
Microsoft:
Total Sales: $110 billion
Total Capital: $45 billion
Capital Turnover Ratio: 2.44 ($110 billion/$45 billion)
Adobe:
Total Sales: $11 billion
Total Capital: $2.7 billion
Capital Turnover Ratio: 4.07 ($11 billion/$2.7 billion)
Sources
Investopedia. (n.d.). Capital Turnover Ratio. Retrieved April 12, 2021, from https://www.investopedia.com/terms/c/capital-turnover-ratio.asp
Ahmed, M. (2020, December 10). Capital Turnover Ratio: Definition, Formula, Analysis & Examples. Retrieved April 12, 2021, from https://corporatefinanceinstitute.com/resources/knowledge/finance/capital-turnover-ratio/
Palioura, V. (2020, August 27). What is the Capital Turnover Ratio? Retrieved April 12, 2021, from https://www.thebalance.com/what-is-the-capital-turnover-ratio-4582935