Accountancy · Ch 10 — Accounting Ratios
Net Assets or Capital Employed Turnover Ratio
Net Assets or Capital Employed Turnover Ratio
The Net Assets Turnover Ratio (also called the Capital Employed Turnover Ratio) measures how efficiently a business uses its total long-term funds (capital employed) to generate revenue from operations. It answers the question: for every rupee of capital invested in the business, how many rupees of sales are produced?
A higher ratio indicates better activity and profitability — the business is squeezing more sales out of each rupee of capital. A low ratio suggests idle or underutilised resources.
Net Assets or Capital Employed Turnover Ratio = Revenue from Operations / Capital Employed
Capital employed here means the total of shareholders' funds and long-term debts. In the balance sheet, this equals Net Assets (total assets minus current liabilities). The two terms are used interchangeably in this ratio.
Two Sub-Ratios
The capital employed turnover ratio is analysed further by breaking capital employed into its two main components: fixed assets and working capital. This gives two more specific turnover ratios.
(a) Fixed Assets Turnover Ratio
This ratio shows how efficiently fixed assets (like plant, machinery, land, buildings, furniture, motor cars) are being used to generate revenue.
Fixed Assets Turnover Ratio = Net Revenue from Operations / Net Fixed Assets
Net Fixed Assets means the book value of fixed assets after deducting accumulated depreciation. A high ratio here means the firm is using its fixed assets intensively.
(b) Working Capital Turnover Ratio
This ratio measures how effectively working capital (current assets minus current liabilities) is being utilised to produce sales.
Working Capital Turnover Ratio = Net Revenue from Operations / Working Capital
Working capital is the short-term funds available for day-to-day operations. A very high ratio may indicate overtrading (too little working capital for the volume of sales), while a low ratio suggests idle current assets.