Enter the total annual sales of a business, and the total amount of stockholders’ equity into the calculator to determine the capital turnover.
Capital Turnover Formula
The following formula is used to calculate a working capital turnover ratio,
CTR = NS / SE
- Where CTR is the capital turnover ratio
- NS is the annual net sales ($)
- SE is the stockholders’ equity ($)
Capital Turnover Definition
Capital turnover is defined as the ratio of net sales to the total amount of stockholders’ equity.
What is a good capital turnover ratio?
A good capital turnover ratio depends on the type of company. For service or software base companies, assets are very low while net sales can be high, so their capital turnover ratio will be very high. For a sector such as car manufacturing, the amount of assets value is much higher, so the stockholders’ will invest much more equity for the same amount of sales.
What does capital turnover represent?
At its core, a capital turnover is calculated to try and represent and understand the amount of stockholders’ equity that needs to be invested into a business in order to generate net positive sales. Companies that specialize in software as a service have very high capital turnovers because the equity required to start is extremely low.
A capital turnover can also be used to understand the value of an investment. The higher the turnover the greater the potential investment. This is only one metric, so it should be used in combination with other information.
Why is capital turnover important?
A capital turnover is an important metric in valuing a business or business prospect, but it’s not without its flaws.
For example, if a company takes out loans to generate additional sales instead of issuing more equity, then the capital turnover will increase, but the risk of the company will have also gone up because of the high leverage.
Another limitation of capital turnover is that it only considers net sales. It does not consider profit, which is often considered the more important metric.
Capital Turnover Example
How to calculate capital turnover ratio?
- First, determine the net sales.
Over a given period of time, calculate the total net sales revenue generated. For this example, the net sales were $10,000.00
- Next, determine the total stockholders’ equity.
Over the same time period, calculate the total amount of stockholders’ equity. For this example, the equity issued was $5,000.00.
- Finally, calculate the capital turnover.
Use the formula above to calculate the capital turnover. So, $10,000.00/$5,000.00 = 2.
Capital turnover is a ratio of the total annual sales of a business compared with the total amount of its stockholders’ equity.