Understanding Cash Turnover Ratios
The Cash Turnover Ratio indicates the number of times cash and cash equivalents are turned into revenue in an accounting period. It measures the efficiency of the company's cash management and how many times it utilizes its cash to generate revenue. It is more effective for companies that do not offer credit sales.
The formula to derive Cash Turnover Ratio
Total Revenue -
It indicates how much a company's revenue is before deducting any expenses. Total revenue is found in the company's Income Statement.
Cash and Cash Equivalents -
These are liquid assets that are found in a company's Balance Sheet. Cash equivalents are short-term commitments such as commercial papers, marketable securities, treasury bills, etc., which are easy to convert into cash.
Example of Cash Turnover Ratio:
For the financial year, Dixon Technologies Limited reported Total revenue as Rs. 6448.17 and Cash and Cash Equivalent as Rs. 176.17.
The value as per the formula (Total Revenue / Cash and Cash Equivalent) is calculated as (6448.17 / 176.17) = 36.60.
The cash turnover ratio is an efficiency metric that indicates the number of times cash equivalents are turned into revenue in an accounting period.
The cash turnover ratio is calculated as total revenue divided by cash and cash equivalents.
For better analysis, compare companies that operate in the same industry, as cash turnover ratio differs from industry to industry.
While looking at the Cash Turnover Ratio, the following points should also take into consideration:
A high ratio is considered good as it indicates that the company has an efficient cash management system and turns its cash quickly.
A low cash turnover ratio indicates that the company is not managing its cash efficiently to generate revenue and taking a long period to complete its cash flow cycle.
The cash turnover metric is more effective for companies that do not offer credit sales. If we apply this metric for the company which offers credit sales, then the ratio may appear larger than it should be.
How to use Cash Turnover Ratio effectively
Investors should look for a high cash turnover ratio. But look at other factors in depth.
For better analysis of the company compared its industry peer for better analysis as cash turnover ratio differs from one industry to another.
To get a more accurate analysis of the company, also use other financial metrics relative to Cash Turnover Ratio such as Current Ratio
, Quick Ratio
, Cash Ratio