IPA IP 2023 Question 20

Total capital turnover — net sales divided by total capital shows how many times a year the capital is turned into sales, that is, how efficiently it is used.

Total capital turnover = net sales ÷ total capital (liabilities plus net assets, equal to total assets), in times per year. A company with sales of 500 million and total capital of 250 million turns its capital over twice a year; the higher the figure, the more sales each unit of capital produces. Financial ratios fall into groups: turnover ratios measure efficiency, profit ratios measure profitability, and equity and break-even ratios measure safety.

Answer (c)

Why not others:

• •(a) Ratio of operating profit to net sales — a profit margin: how much profit each unit of sales earns, profitability rather than use of capital
• •(b) Equity to total assets — the equity ratio: how much of the capital is not borrowed, a measure of financial stability
• •(d) Break-even point ratio — break-even sales ÷ actual sales: how close the company is to a loss, a measure of the safety of its profit structure

Key rule: Sort a ratio by what it divides: sales ÷ capital is turnover (efficiency), profit ÷ sales is margin (profitability), and profit ÷ capital combines them, since it equals margin × turnover.

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