Capital turnover ratio

 Meaning: this ratio establishes a relationship among net sales and capital employed.

Objective: the objective of computing this ratio is to verify the efficiency with which the capital employed is utilized.

Components: there are two components of this ratio which are as under:

Net sales

Capital employed

Computation: this ratio is computed by separating the net sales by the capital employed. This ratio is usually expressed as x number of time. In the form of a formula this ratio might be expressed as under.

Capital turnover ratio= net sales/capital employed

Net sales = gross sales-sales return

Capital employed= long term debt + shareholder's fund

Interpretation: it shows the firm's ability to generate sales per rupee of capital employed. The higher the ratio the greater is the dales made per rupee of capital employed in the firm and as higher is the profit. A low capital turnover ratio to low sales generated in relation to capital employed or excessive capital being used in the firm.