Turnover Ratios
i) Assets turnover = Sales
Total assets
2) Fixed assets turnover = Sales [Number of times fixed assets has
Fixed assets turned into sales]
3) Working capital turnover = Sales
Working capital
4) Inventory turnover = Cost of goods sold
(for finished goods) Average inventory
5) Debtors turnover (or) Average collection period = Credit sales (in ratio)
Average accounts receivable
(or) = Average accounts receivable * 365 (in days)
Credit sales
6) Creditors turnover (or) Average payment period Credit purchases (in ratio)
Average accounts payable
(or) = Average accounts Payable * 365 (in days)
Credit Purchases
7) Inventory Turnover (for WIP) = Cost of production
Average Inventory (for WIP)
8) Inventory Turnover (for Raw material) = Raw material consumed
Average inventory (for raw material)
10) Inventory Holding Period = 365 .
Inventory turnover ratio
11) Capital Turnover ratio = Cost of sales
Capital employed
Note : -
• Working capital = Current asset – Current liability
= 0.25 * Proprietary ratio
• Accounts Receivable = Debtors + Bills receivable
• Accounts payable = Creditors + Bills Payable
Remarks : -
• If assets turnover ratio is more than 1, then profitability based on capital employed is profitability based on sales.
• Higher inventory turnover is an indicator of efficient inventory movement. It is an indicator of inventory management policies.
• Low inventory holding period lower working capital locking, but too low is not safe.
• Higher the debtors turnover, lower the credit period offered to customers. It is an indicator of credit management policies.
• Higher the creditors turnover, lower the credit period offered by suppliers.
G) Other Ratios: -
1) Operating profit ratio = Net profit ratio + Non operating loss / Sales ratio
2) Gross profit ratio = Operating profit ratio + Indirect expenses ratio
3) Cost of goods sold / Sales ratio = 100% - Gross profit ratio
4) Earnings per share = Net profit after interest and tax
Number of equity shares
5) Price earning ratio = Market price per equity share
Earning per share
6) Pay out ratio = Dividend per equity share * 100
Earning per equity shares
7) Dividend yield ratio = Dividend per share * 100
Market price per share
8) Fixed charges coverage ratio = Net profit before interest and tax
Interest charges
9) Interest coverage ratio = Earning before interest and tax
Interest charges
10) Fixed dividend coverage ratio = Net profit .
Annual Preference dividend
11) Over all profitability ratio = Operating profit * 100
Capital employed
12) Productivity of assets employed = Net profit .
Total tangible asset
13) Retained earning ratio = Retained earnings * 100
Total earnings
H) General Remarks: -
• Fall in quick ratio when compared with last year or other company is due to huge stock pilling up.
• If current ratio and liquidity ratio increases then the liquidity position of the company has been increased.
• If debt equity ratio increases over a period of time or is greater when comparing two ratios, then the dependence of the company in borrowed funds has increased.
• Direct expenses ratio increases in comparison then the profitability decreases.
• If there is wages / Sales ratio increases, then this is to verified
a) Wage rate
b) Output / Labour rate
• Increment in wage rate may be due to increased rate or fall in labour efficiency.
• Again there are many reasons for fall in labour productivity namely abnormal idle time due to machine failure, power cut etc.
• Reduction in Raw material consumed / sales ratio may be due to reduction in wastage or fall in material price.
• Increase in production expenses ratio may also be due to price raise.
• Stock turnover ratio denotes how many days we are holding stock.
• In stock turnover ratio greater the number of days, the movement of goods will be on the lower side.
• Financial ratios are Current ratio, Quick ratio, Debt equity ratio, Proprietary ratio, Fixed asset ratio.
• Short term solvency ratios are current ratio, Liquidity ratio
• Long term solvency or testing solvency of the company ratios are Debt equity ratio, fixed asset ratio, fixed charges coverage ratio (or) Interest coverage ratio.
• To compute financial position of the business ratios to be calculated are – current ratio, Debt equity ratio, Proprietary ratio, fixed asset ratio.
• Fictitious asset are Preliminary expenses, Discount on issue of shares and debentures, Profit and loss account debit balance.
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