Current Asset Turnover
Current Asset Turnover - an activity ratio measuring firm’s ability of generating sales through its current assets (cash, inventory, accounts receivable, etc.). It can be calculated by dividing the firm's net sales by its average current assets, and it shows the number of turns made by the current assets of the enterprise.
The values may vary between businesses and industries, and the normative value is absent. However, higher current asset turnover comparing to competitors would indicate a high intensity of the current assets usage. The increasing trend of this ratio is a good sign because this means that the company is working on the consistent improvement of its policies in inventory, accounts receivable, cash and other current assets management. In fact, increasing current asset turnover leads to the decrease of the financial resources amount, needed for the company's operations maintenance. This means that bigger part of the financial resources can be used for current operations intensification or making investments. The decrease of the current assets turnover indicates the firm's increasing need of sources of finance. If the access to sources of finance is limited, this will cause the increase of the company's financial expenses.
Resolving the problems with the current asset turnover exceeding the normative range:
In case the current asset turnover value is low there are following ways to increase it:
- decreasing the inventory stock to the minimum level, which would allow the continuous operational process;
- sales promotion and decreasing the finished goods stock;
- activation of the accounts receivable collection process, etc.
Current Asset Turnover = Net Sales ÷ Average Current Assets
Same as with total asset turnover, there are few ways of the average current assets calculation. If the internal company report is available for access, then the average total assets amount should be calculated considering the values for current assets at the end of every working day. For monthly data the values should be taken from the end of every month. Finally, for yearly reports the average value of the current assets amount from the beginning and the end of the year should be taken for calculations.
Current Asset Turnover (Year 1) = 3351 ÷ 656 = 5,10
Current Asset Turnover (Year 2) = 3854 ÷ 766 = 5,03
Year 2 witnessed a slight decrease of firm’s current asset turnover ratio from 5,10 to 5,03 comparing to year 1. This indicates a slight decline in firm’s ability of generating sales through its current assets, such as cash, inventory, accounts receivable, etc. In other words, in year 1 firm generated $5,10 of sales for every current assets dollar, in year 2 it started generating 5,03 times as much sales as its current assets. One of the causes that influenced this decrease was the accounts receivable growth. To increase the current asset turnover some measures have to be taken to return the company's funds. For avoiding the risk of the same problem arising again in future the complex strategy of commercial credit provision for clients should be developed. Within the framework of this strategy, all clients should be split into groups, depending on the history of the collaboration with them, their financial condition and their importance for the company. The main share of consumer and commercial loans must belong to the most reliable and important clients.
Current asset turnover reflects how many times do current asset turn over during the fiscal year. This indicator shows how much money was generated by a dollar of used current assets. Positive is an increasing trend of the current asset turnover over the analyzed period.