## Activity / Turnover Ratios
Also called Efficiency, Performance, Turnover, or Asset Management ratios. They evaluate how efficiently a firm manages and utilises its assets to generate sales. They indicate the frequency of sales relative to assets (capital assets, working capital, or average inventory) and are usually computed with reference to Sales / Cost of Goods Sold, expressed as a rate or number of times.
### Asset-based turnover ratios
| Ratio | Formula | Interpretation |
|---|---|---|
| Total Asset Turnover | Sales (or COGS) ÷ Total Assets | Higher → efficient use of total assets to generate sales |
| Fixed Assets Turnover | Sales (or COGS) ÷ Fixed Assets | Higher → efficient use of fixed assets (note: old plant may inflate this vs. recently bought) |
| Capital / Net Asset Turnover | Sales (or COGS) ÷ Net Assets | Sales generated per rupee of long-term investment (Net Assets = Capital Employed) |
| Current Assets Turnover | Sales (or COGS) ÷ Current Assets | Higher → efficient use of current assets |
| Working Capital Turnover | Sales (or COGS) ÷ Working Capital | Higher → efficient use of working capital |
Caution on Working Capital Turnover: a very high ratio indicates the company may need to raise additional working capital for future needs.
Working capital turnover is further segregated into Inventory, Debtors (Receivables), and Creditors (Payables) turnover.
### i. Inventory / Stock Turnover Ratio
Establishes the relationship between cost of goods sold and average inventory; indicates how fast inventory is used or sold.
$$\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold / Sales}}{\text{Average Inventory}}, \quad \text{Average Inventory} = \frac{\text{Op. Stock} + \text{Cl. Stock}}{2}$$
For raw material:
$$\text{RM Inventory Turnover} = \frac{\text{Raw Material Consumed}}{\text{Average Raw Material Stock}}$$
- High ratio → good for liquidity (inventory moving fast).
- Low ratio → inventory lying idle/obsolete in the warehouse.
### ii. Receivables (Debtors) Turnover Ratio
Measures efficiency of managing accounts receivable and throws light on collection/credit policy.
$$\text{Receivables Turnover} = \frac{\text{Credit Sales}}{\text{Average Accounts Receivable}}$$
- Low ratio → liberal credit terms to customers.
- High ratio → collections made rapidly.
Average Collection Period (Debtors Velocity):
$$= \frac{\text{Average Accounts Receivable}}{\text{Average Daily Credit Sales}} \quad \text{or} \quad \frac{12\text{ months} / 52\text{ weeks} / 360\text{ days}}{\text{Receivables Turnover Ratio}}$$
where Average Daily Credit Sales = Credit Sales ÷ No. of days in year.
### iii. Payables (Creditors) Turnover Ratio
Measures how fast a company pays its creditors (velocity of payables).
$$\text{Payables Turnover} = \frac{\text{Annual Net Credit Purchases}}{\text{Average Accounts Payable}}$$
- Low ratio → liberal credit terms from suppliers.
- High ratio → accounts settled rapidly.
Average Payment Period (Payables Velocity):
$$= \frac{\text{Average Accounts Payable}}{\text{Average Daily Credit Purchases}} \quad \text{or} \quad \frac{12\text{ months} / 52\text{ weeks} / 360\text{ days}}{\text{Payables Turnover Ratio}}$$
The firm can compare the credit period it receives from suppliers with the credit period it offers to customers, and benchmark against the industry.
### Doubt Busters
- Only selling & distribution expenses differentiate COGS from Cost of Sales (COS). Without them, COGS = COS.
- Use COGS / Cost of Sales for turnover ratios to eliminate the profit element.
- Average figures of assets / net assets / capital employed / working capital may be used in the denominator; when average figures are available they are preferred.
- Deviate from formulae only when the requirement/data demand it, and state assumptions.