Financial Ratios - Turnover Ratios

Turnover ratios are also referred to as Activity Ratios  or Asset Management Ratios .

They show the relationship between levels of different assets. They tell us how efficiently assets are deployed by the firm.

Key Turnover ratios are

Inventory Turnover Ratio = Net Sales/ Inventory

The numerator of this ratio is net sales for the year and the Denominator is the inventory balance at the end of the year. This ratio reflects the efficiency of inventory management. The inventory should be inline with sales; not too high not too low.

Average Collection Period = Receivables / Average Sales Per day

For eg: If Receivables = 11.8 crores and  Sales for the year = 701 crores, then
Average collection Period = 11.8/(701/360) = 61 days

The average collection period reflects the efficiency of collections and the credit terms offered by the enterprise. It should be low for a smooth business.

Receivables Turnover Ratio = Net Credit Sales/ Receivables

This shows how many times the company turns over its receivables. A high value of this ratio indicates tight credit policy and a low value indicates there is a problem with the collections.

Fixed Assets Turnover Ratio = Net sales / Fixed Assets

This ratio shows how efficiently fixed assets are used to generate sales. A high value indicates efficient management of fixed assets.

Total Assets Turnover Ratio = Net Sales/ Total Assets

It’s the relation between the total assets and sales. Total assets include all types of assets; fixed and short term. It is high for an efficient business firm.
 

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May 31, 2009 | Filed Under Fundamental Analysis 

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