Operating assets turnover ratio

Operating assets turnover ratio (also known as current assets turnover ratio) is an improvement on the total assets turnover ratio. It shows the number of times operating assets are turnover in the year. Operating assets for this purpose are the current assets.

Operating or current assets are closely linked to volume of business. Stocks levels are obviously dependent on the volume of sales but so are debtors (that arise only because of sales) and the cash level which is maintained in order to service the day to day requirements arising  out of operational needs of the business. A high operating assets turnover ratio indicates efficient use of the funds invested in current assets; a low operating assets turnover ratio indicates the opposite. At the same time, carrying a high level of current assets enables a business to satisfy its customers more promptly and to offer them better choice. This can in itself lead to growth in sales volume and profits. If that increase in profits is better than the cost of funds invested in the larger current assets levels, a lower operating assets turnover ratio may be justified. Hence, maintaining the right level of operating assets in relation to the company’s turnover is of vital importance.


Formula

operating-assets-turnover-ratio-formula

Example

The following data belongs to John Trading Concern:

Current assets at the beginning of the year 2016: $1,650,000
Current assets at the end of the year 2016: $1,550,000
Net sales made during the year 2016: $4,800,000

Calculate operating/current assets turnover ratio of John Trading Concern for the the year 2016.

Solution

Current turnover ratio = Sales/Average total assets
= $4,800,000/$1,600,000*
= 3.00

*($1,650,000 + $1,550,000)/2

Current assets turnover ratio of John Trading Concern is 3 which tells us that each dollar invested in current assets generates $3 in net sales revenue. For a meaningful conclusion of how efficiently the current assets has been used during the period, John Trading Concern must compare its operating/current assets turnover ratio with that of others in the same business or with the industry average.

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