Activity (or Turnover) Ratios

Activity (or Turnover) Ratios

1.   Stock Turn-over

Stock Turnover Ratio  =  Cost of Goods Sold/ Average Stock

Significance : It studies the frequency of conversion of stock of finished goods into sales. It is also a measure of liquidity. It determines how many times stock is purchased or replaced during a year. Low turnover of stock may be due to bad buying, obsolete stock, etc. and is a danger signal. High turnover is good but it must be carefully interpreted as it may be due to buying in small lots or selling quickly at low margin to realise cash. Thus, it throws light on utilization of stock of goods.

2.   Debtors (Receivables) Turnover Ratio

Debtors Turnover ratio = Net Credit sales/ Average Accounts Receivable

Where Average Account Receivable = (Opening Debtors and Bills Receivable +   Closing Debtors and Bills Receivable)/2

Significance: The liquidity position of the firm depends upon the speed with which debtors are realised. This ratio indicates the number of times the receivables are turned over and coverted into cash in an accounting period. Higher turnover means speedy collection from debtors. This ratio also helps in

working out the average collection period, ratio calculated by dividing the days/months in a year by debtors turnover ratio.

3.   Creditors (Payable) Turnover Ratio

Creditors Turnover ratio = Net Credit purchases / Average accounts payable

Where Average account payable = (Opening Creditors and Bills Payable + Closing Creditors and Bills Payable)/2

Significance : It reveals average payment period. Lower ratio means credit allowed by the supplier is for a long period or it may reflect delayed payment to suppliers which is not a very good policy as it may affect the reputation of the business.

The average period of payment can be worked out by ys / months in a year by the turnover rate.

4.   Investment (Net Assets) Turnover Ratio

Investment (Net Assets) Turnover ratio  = Net Sales/Capital Employed

5.   Fixed Assets Turnover :

  Fixed asset turnover = Net Sales/Net Fixed Assets

6.   Working Capital Turnover :

   Working Capital Turnover = Net Sales/Working Capital