The operating assets turnover ratio, also known as the current assets turnover ratio, is an improvement on the total assets turnover ratio. It shows the number of times operating assets are turned over in the year.
Operating assets for this purpose are the current assets. Operating or current assets are closely linked to the volume of business.
Stock levels are obviously dependent on the volume of sales, but so are debtors (which arise only because of sales) and the cash level, which is maintained in order to service the day-to-day requirements arising out of the operational needs of the business.
A high operating assets turnover ratio indicates the 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 choices. This can in itself lead to growth in sales volume and profits.
If the 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.
The following data were obtained from 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
Required: Calculate the operating/current assets turnover ratio of the company for the year 2016.
Current turnover ratio = Sales/average total assets
*($1,650,000 + $1,550,000)/2
The current assets turnover ratio of John Trading Concern is 3. This tells us that each dollar invested in current assets generates $3 in net sales revenue.
For a meaningful conclusion of how efficiently current assets have 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.