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

Author

Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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