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Current assets turnover is an efficiency measurement accountants apply to a company’s financial statements. Both the income statements and balance sheets have the requisite information for computing this ratio. The result from this formula is a metric that indicates how well a company generates sales revenue from the current assets it owns. A higher number is generally preferable as the company uses its assets in the most efficient manner possible. Accountants can compute the current assets turnover ratio on a monthly basis.
A company’s current assets are those items that last less than 12 months in the business. The most common current assets include cash, cash equivalents, inventory, and other general current assets listed on a balance sheet. In most cases, the company reports these items at the very top of the balance sheet’s asset section. Accountants report these figures at their historical cost, which is the amount the company paid at the time of purchase. In some cases, a company may choose to leave out inventory if these items do not sell frequently.
The current assets turnover ratio is fairly basic; the most common formula divides sales by average current assets. Sales are the top figure reported on a company’s income statement. Average current assets take an extra step to compute. Accountants add together the beginning monthly balance for current assets and the ending monthly balance for current assets and then divide this figure by two. The result is the denominator for the current assets turnover ratio.
The resulting figure from the current assets turnover ratio is a metric that details the use of current assets. For example, the metric indicates how many times a company went through current assets in order to generate sales, hence turning over these items. Higher numbers prove that a company turns over more current assets to generate sales, meaning the business uses these items efficiently. A common way to look at this is by separating figures over or under 1.0 from the ratio. Results less than 1.0 indicate a company does not turn over its entire current assets balance more than once in a given period.
Financial ratios work best as a benchmark. Accountants should compare the current assets turnover ratio to historical trends or an industry average. This process can tell the company how well it operates under given market conditions at a specific time. Owners and executives can often make changes to operations in order to improve this ratio.