Question

ABC’s capital turnover ratio 1.5x’s; 1.6x’s, 1.7x’s, 1.8x’s for years 1,2,3,4 respectively. How could you tell if this trend will continue in the future? What does this trend in the capital turnover indicate to the analyst? Be specific.

Answer 1

We see that the capital turnover ratio is increasing every year. This ratio indicate how much a company can grow its current investment level. It is computed by dividing the annual sales by capital employed. As the ratio is growing it indicates that the company is increasing its sales corresponding to lower capital. Going by the historical trend, it is likely that this is a planned move and will continue in the future.

The rising turnover indicates that the company is becoming more efficient as regards capiital used. This is a positive sign for the analyst and shows that the company's efficiency is increasing.