BEST UNDERSTOOD WHEN COVERED

ALONG WITH THE VIDEOS ON TURNOVER

TURNOVER RATIOS
LOG ON TO WWW.ANUJJINDAL.IN

RATIOS
SUCCESSRBI@ANUJJINDAL.IN
9999466225

WWW.ANUJJINDAL.IN

COURSES OFFERED:

RBI GRADE B
SEBI GRADE A
NABARD GRADE A
UGC NET/JRF
 TURNOVER RATIOS

Efficiency Ratios/ activity ratio/ turnover ratio-

Efficiency ratios also called activity ratios measure how well companies utilize their assets to
generate income. Efficiency ratios often look at the time it takes companies to collect cash
from customer or the time it takes companies to convert inventory into cash—in other
words, make sales. These ratios are used by management to help improve the company as
well as outside investors and creditors looking at the operations of profitability of the
company.

Efficiency ratios go hand in hand with profitability ratios. Most often when companies are
efficient with their resources, they become profitable. Wal-Mart is a good example. Wal-
Mart is extremely good at selling low margin products at high volumes. In other words, they
are efficient at turning their assets. Even though they don't make much profit per sale, they
make a ton of sales. Each little sale adds up.

Revision Grid
How well a
company utilise can
964 assets both short term and
long term relative to turnovers

on
Types of Efficiency ratios:

• Stock/ Inventory turnover ratio- The inventory turnover ratio is an efficiency ratio
that shows how effectively inventory is managed by comparing cost of goods sold with
average inventory for a period. This measures how many times average inventory is stockis
I
"turned" or sold during a period. In other words, it measures how many times a company valued at
sold its total average inventory dollar amount during the year. A company with $1,000 of cost
average inventory and sales of $10,000 effectively sold it 10 times over.
Therefore
Inventory turnover ratio = cost of goods sold/ average inventory
it is
i compared
f
haveCOGS = opening stock + Purchases + Direct Expenses – Closing Stock with
wookettCOGS = sales- gross margin/ profit cogs in
this Average stock = opening stock + closing stock/ 2 this ratio
b
µ • Asset Turnover ratio- The asset turnover ratio is an efficiency ratio that measures a
company's ability to generate sales from its assets by comparing net sales with average total
assets. In other words, this ratio shows how efficiently a company can use its assets to
generate sales.

SUCCESSRBI@ANUJJINDAL.IN 1
 TURNOVER RATIOS

The total asset turnover ratio calculates net sales as a percentage of assets to show how
many sales are generated from each dollar of company assets. For instance, a ratio of .5
means that each dollar of assets generates 50 cents of sales.

gFoRMVLA_
Asset Turnover ratio = net sales / average total assets

• Debtors/ Accounts receivable turnover ratio- Accounts receivable turnover measures

how many times a business can turn its accounts receivable into cash during a period.
In other words, the accounts receivable turnover ratio measures how many times a
business can collect its average accounts receivable during the year.
This ratio shows how efficient a company is at collecting its credit sales from customers.
Higher ratios mean that companies are collecting their receivables more
frequently throughout the year.

Accounts receivable turnover ratio= net credit sales/ average accounts receivable

Net credit sales = credit sales – sales return

Average debtors = (opening debtors + opening bills receivable + closing debtors + closing
bills receivable)/ 2
NOTE: Doubtful debtors are not to be deducted from debtors since the purpose is to find
out days for which sales are tied up in debtors.
Doubtful Debt_provision
Average collection period is calculated after you have calculated debtors turnover ratio. The
formula is: debt
Debt collection period (number of months) = 12/ debtors turnover ratio

Revision Grid
we have done 3 ratios till date
Stock turnover
Asset turnover
Debtors turnover

• Creditor’s Turnover Ratio- Enterprises from whom goods have been purchased are
known as creditors or trade payables. Creditors and bills payable are together called as
total payables. The ratio shows relationship between net credit purchases and average
payables.

SUCCESSRBI@ANUJJINDAL.IN 2
 TURNOVER RATIOS

Creditor’s turnover ratio = net credit purchases/ average payables

Average payables = opening creditors + opening bills payable + closing creditors and closing
bills payable/ 2

• Working capital Turnover ratio- it establishes relationship between working

E
capital and sales. The ratio indicates whether working capital has been effectively
utilized or not.
Working capital turnover ratio = net sales/ working capital
Net Working capital = Current Assets – Current Liabilities

SUCCESSRBI@ANUJJINDAL.IN 3