Cash Turnover Ratio Analysis

Definition: Cash Turnover Ratio shows the number of times that cash turnover in a year. A lower ratio may indicate the inefficient use of working capital.

Formula:
Cash Turnover = Cost of sales / Cash
Or,
Cash Turnover Ratio = 365 days / Cash balance ratio

Example 1:
Info Ltd. has the following data:
Opening stock $20,000
Closing stock $10,000
Purchases $6,000
Purchase returns $1,000
Cash $25,000
Then, the Cost of sales = 20,000 + (6,000 - 1,000) - 10,000 = $15,000
Cash Turnover Ratio = 15,000 / 25,000 = 0.6

Example 2:
XYZ Company has an average of $6,000 cash each month and has a cash turnover ratio of 1.5 based on historical information. Then:
Cost of sales = Cash Turnover * Cash = 1.5 * 6,000 = $9,000
Thus the company will need $9,000 to pay for its cost of goods sold for the next period.

* Next: Creditors Turnover Ratio Formula & Example
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