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EduPristine>Blog>Ratio Analysis – Turnover Ratio

Ratio Analysis – Turnover Ratio

August 21, 2014

turnover ratios

source: accountadjustment.us

If you’re new to Ratio Analysis, read the basics of ratio analysis before starting this topic.

Efficiency Ratios or Performance Ratios or Activity Ratios are the other functional terms coined for

Turnover ratio. Turnover Ratios draw attention to the diverse aspects of financial statement to meet

the requirements of different parties interested in the business. It also underlines the efficiency with

which different assets are vitalized in a business. Turnover means the number of times assets are

converted or turned over into sales. The activity ratios indicate the rate at which different assets are

turned over.

The following activities or turnover ratios can be calculated:

  • Inventory Ratio or Stock Turnover Ratio

  • Debtor’s Turnover Ratio or Receivable Turnover Ratio

  • Debtor’s Collection Period Ratio

  • Creditor’s Turnover Ratio or Payable Turnover Ratio

  • Working Capital Turnover Ratio

  • Fixed Assets Turnover Ratio

  • Capital Turnover Ratio.

Inventory Ratio or Stock Turnover Ratio

It is used to measure whether the investment in stock in trade is effectively utilized or not. It

reveals the affiliation between sales and cost of goods sold or average inventory at cost price or

average inventory at selling price. It indicates the number of times the stock has been turned over in

business during a particular period.

Stock Turnover Ratio = Cost of Goods Sold / Average Inventory at Cost

Debtors Turnover Ratio

This ratio indicates the efficiency of the debt collection period and the extent to which the debt

have been converted into cash. This ratio is complementary to the Debtor Turnover Ratio. It is very

helpful to the management because it represents the average debt collection period

Debtors Turnover Ratio = Net Credit Sales / Average Receivables

Debt Collection Period Ratio

This ratio highlights the competence of the debt collection period and the magnitude to which the

debt have been converted into cash. This ratio is corresponding to the Debtor Turnover Ratio. It

plays an instrumental to the management because it denotes the average debt collection period.

Debt Collection Period Ratio = Receivables x Months or days in a year / Net Credit Sales for the year

Creditor’s Turnover Ratio or Payable Turnover Ratio

Payable Turnover Ratio is also termed as Creditor’s T.R or Creditor’s Velocity. The credit

purchases are recorded in the accounts of the buying companies as Creditors to Accounts Payable.

The Term Accounts Payable or Trade Creditors comprise of sundry creditors and bills payable.

This ratio corroborates the relationship between the net credit purchases and the average trade

creditors. Creditor’s velocity ratio underlines the number of times with which the payment is made

to the supplier apropos to credit purchases.

Creditor’s Turnover Ratio = Net Credit Purchases / Average Accounts Payable

Working Capital Turnover Ratio

The effective employment of working capital pertaining to sales is indicated by this ratio. This ratio

signifies the firm’s liquidity position. It institutes relationship between cost of sales and networking

capital.

Working Capital Turnover Ratio = Net Sales / Working Capital

Fixed Asset Turnover Ratio

This ratio indicates the efficiency of assets management. Fixed Assets T.R is put to

application to gauge the optimum utilization of fixed assets. This ratio forms the liaison between

cost of goods sold and total fixed assets. Underutilization of fixed assets is demonstrated, if the ratio

is depressed.

Fixed Asset Turnover Ratio = Cost of goods Sold / Total Fixed Assets

Capital Turnover Ratio

This ratio measures the efficiency of capital utilization in the business. It illustrates the relationship

between cost of sales or sales and capital employed or shareholders’ fund.

Capital Turnover Ratio = Cost of goods Sold / Total Fixed Assets

We hope this blog must have given you the best insights when it comes to Turnover Ratios. Incase of any doubts or clarifications, leave you comments in the below box and we’ll get back to you at the earliest

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