ACTIVIITY / TURNOVER RATIOS

Activity / Turnover Ratios are a set of financial ratios used to

measure the efficiency of various operations of a business.

Activity ratios measure the efficiency of the firm in

Using its resources/assets. These ratios are also known as Asset
Management Ratios.

Because these ratios indicate the efficiency with which the assets
of the firm are managed/utilized.
Activity / Turnover Ratios essentially evaluate the operational efficiency of any business by
measuring the rate of utilization of various assets. These ratios are directly linked with the
Life blood of a business i.e. Revenue. The efficiency measured in terms of generation of
revenue but the respective assets. These ratios are also known as performance/efficiency
Ratios.

Asset such as machinery, raw materials, debtors etc are introduced to a firm to generate
sales for the firm and there but generate profits. These turnover ratios indicate the speed
at which these assets are converted into sales. For example, inventory turnover ratio
indicates the number of times the inventory is converted into sales in a year.

The result of an activity/turnover ratio is an absolute number representing the efficiency

of the asset utilization. Higher the ratio better is the efficiency.
Types of Turnover Ratios

Stock/Inventory Turnover Ratio

Debtor/Receivable Turnover Ratio
Debt collection period Ratio
Creditors Turnover Ratio
Credit Payment Period
Asset turnover Ratio
Working Capital Turnover Ratio

Stock/Inventory Turnover Ratio

Inventory turnover ratio indicates how many times inventory is sold
And replaced in a financial year. In otherworld's, the ratio gives the frequency of
Conversion of inventory into cash in a given financial year. Normally, a higher ratio is
Considered good as it suggests better inventory management.

Stock/Inventory Turnover ratio = Cost of goods sold during the year

Average Inventory
DEBTOR/RECEIVABLE TURNOVER RATIO

The receivable turnover ratio indicates the frequency of conversion from

Debtors to cash normally in a year.

Debtor Turnover Ratio = Credit Sales/Average Account Receivable

DEBT COLLECTION PERIOD RATIO

This ratio gives a time period in which debt are converted into cash.

Debt Collection Period Ratio=(365 days of 12 months)/Debtor Turnover ratio

CREDITORS TURNOVER RATIO

It is similar to Debtors turnover ratio. It indicates the speed with which the
payments for credit purchases are made to the creditors.

Creditors Turnover Ratio = Credit Purchases / Average Accounts Payable

CREDIT PAYMENT PERIOD

The ratio gives the average credit period enjoyed from the creditors.

Credit Payment Period = (365 days of 12 months) / Creditors Turnover Ratio

ASSET TURNOVER RATIO

It calculates the value of revenue achieved per dollar of investment. A higher

ratio indicates better asset management and utilization and vice versa. The ratio also
depens on the business to business base on their profit margins. With lower marins,
this ratio is normally high.

TOTAL ASSET TURNOVER RATIO

Total Asset Turnover Ratio is the ratio of sales total assets. The ratio
indicated the extent that the investment in total assets results in sales.

Total Asset Turnover Ratio = Sales / Average Total Assets

Fixed Asset Turnover Ratio

Fixed Asset turnover ratio is the ratio of sales to fixed assets. This ratio
indicates the ability of the company’s management to put the fixed assets to work to
generate sales.

Fixed Asset Turnover Ratio = Sales / Average Fixed Assets

WORKING CAPITAL TURNOVER RATIO

Working Capital Turnover Ratio = Sales / Average Working Capital

EXERCISE : PROFITABILITY RATIO

Profit is the engine that drives the business enterprise. A business

needs profit not only for its existence but also for expansion and diversfication.

The investors want an adequate return on their investments, workers

want higher wages, creditors want higher security for their interest and loan
and so on.

Gross Profit Ratio

Net Profit Ratio
Operating Ratio
Expenses Ratio
 GROSS PROFIT RATIO
Rs Rs
Sales 3,00,000 Purchases 2,00,000

Sales Return 25,000 Purchase Return 10,000

Opening Stock 20,000 Closing Stock 50,000

Solution:
TRADING ACCOUNT
PARTICULARS AMOUNT AMOUNT PARTICULARS AMOUNT AMOUNT

Opening 20,000 By Sales 3,00,000

stock
Purchase 2,00,000 (-) return 25,000 2,75,000

(-) returns 10,000 1,90,000 By closing 50,000

stock
Gross Profit 1,15,000

3,25,000 3,25,000
 Gross Profit Ratio = (Gross Profit / Sales) * 100

= (1,15,000/2,75,000) * 100

= 41.82%
OPERATING RATIO

RS

Cost of goods sold 5,00,000

Selling & Distribution 50,000

Expenses
Office & Administrative 75,000
Expenses
Net Sales 7,50,000
Solution:

Operating Ratio = EBIT (Operating Ratio)/Sales

Operating Ratio = ( (Cost of goods sold + Operating Expenses)/Sales ) * 100

= ( (5,00,000+50,000+75,000)/75,000 ) * 100

= (6,25,000/7,50,00) * 100

= 83.33 %