Definition: The Capital Employed Turnover Ratio shows how efficiently the sales are generated from the capital employed by the firm. This ratio helps the investors or the creditors to determine the ability of a firm to generate revenues from the capital employed and act as a key decision factor for lending more money to the asking firm.
The formula to compute this ratio is:
Capital Employed Turnover Ratio = Net Sales/ Capital Employed
Where, Capital Employed = Net worth + Long-term Borrowings
Net Worth = Share Capital + All Reserves
Higher the ratio better is the utilization of capital employed and shows the ability of the firm to generate maximum profits with the minimum amount of capital employed.
Example: Suppose a firm has a net sales of Rs 50,000 and reported a net worth of Rs 4,00,000 and the long term borrowings amounting to Rs 20,000 in the balance sheet of the firm. The capital employed turnover Ratio will be:
Capital Employed Turnover Ratio = 50,000/4,20,000 = 0.12 times
Capital employed = 4,00,000 + 20,000 = 4,20,000