# Turnover / Activity / Performance Ratios

Turnover ratios indicate how efficiently assets are being used to generate revenue. They are expressed in times (or convertible to days by dividing 365/360 by the ratio — this gives the holding/collection/payment period or velocity).

## 1. Raw Material Turnover Ratio

$$\text{RM Turnover} = \frac{\text{Cost of RM Consumed}}{\text{Average Stock of RM}}$$

Cost of RM Consumed = Opening RM + Purchases − Closing RM
Average RM Stock = (Opening + Closing) / 2

## 2. Work-in-Progress (WIP) Turnover Ratio

$$\text{WIP Turnover} = \frac{\text{Factory Cost}}{\text{Average WIP Stock}}$$

## 3. Finished Goods / Stock Turnover Ratio

$$\text{Stock Turnover} = \frac{\text{COGS (preferred) or Sales}}{\text{Average FG Stock}}$$

Manufacturer: COGS = Opening FG + Cost of Production − Closing FG
Trader: COGS = Opening Stock + Purchases − Closing Stock

## 4. Debtors Turnover Ratio

$$\text{Debtors Turnover} = \frac{\text{Credit Sales}}{\text{Average Accounts Receivable}}$$

Accounts Receivable = Debtors + Bills Receivable.

Debtors Collection Period (Velocity) = 365 / Debtors Turnover (or 12 / Turnover in months).

## 5. Creditors Turnover Ratio

$$\text{Creditors Turnover} = \frac{\text{Credit Purchases}}{\text{Average Accounts Payable}}$$

Accounts Payable = Creditors + Bills Payable.

Creditors Payment Period = 365 / Creditors Turnover.

## 6. Working Capital Turnover Ratio

$$\text{WC Turnover} = \frac{\text{Net Sales}}{\text{Net Working Capital}}$$

Also called Operating Turnover / Cash Turnover. NWC = Current Assets − Current Liabilities.

## 7. Fixed Assets Turnover Ratio

$$\text{FA Turnover} = \frac{\text{Sales}}{\text{Net Fixed Assets}}$$

## 8. Capital Turnover Ratio

$$\text{Capital Turnover} = \frac{\text{Sales}}{\text{Capital Employed}}$$

## Velocity Concept

Velocity = the average number of months (or days) an item is held in the business.

Stock Velocity = (Average Stock / COGS) × 12 months (or 365 days)
Debtor Velocity = (Average Debtors / Credit Sales) × 12 months
Creditor Velocity = (Average Creditors / Credit Purchases) × 12 months

Velocity in months × Turnover = 12. They are reciprocals.

## Notes on Averages

Use averages in the denominator when both opening and closing data are available (consistency).
If only closing values are given, use closing balances uniformly across all ratios.

Worked example

### Example 1

Example (Brave Ltd, Nov 2023): Debtor velocity 3 months; Stock velocity 6 months; Creditor velocity 2 months; GP ratio 20%; Gross profit ₹10,00,000; Stock increase ₹40,000; B/R ₹1,20,000.

Sales = GP / GP Ratio = 10,00,000 / 20% = ₹50,00,000
COGS = Sales − GP = 50,00,000 − 10,00,000 = ₹40,00,000
Avg Debtors+B/R = Sales × (3/12) = 50,00,000 × 0.25 = ₹12,50,000; Debtors = 12,50,000 − 1,20,000 = ₹11,30,000
Avg Stock = COGS × (6/12) = 40,00,000 × 0.5 = ₹20,00,000. If closing stock is ₹40,000 more than opening: Closing Stock = 20,00,000 + 20,000 = ₹20,20,000.

### Example 2

Example (Debtors collection period 30 days, Sales ₹20,00,000 credit): Debtors = (30/360) × 20,00,000 = ₹1,66,667. Debtor turnover = 360/30 = 12 times.

⚠️ Common exam mistakes

Using total sales for Debtors Turnover instead of CREDIT sales only.
Using total purchases for Creditors Turnover instead of CREDIT purchases.
Mixing 360 and 365 days within the same problem — use whichever the question specifies and stay consistent.
Using closing stock instead of average stock when both opening and closing are given.
Confusing factory cost vs cost of production vs COGS — use the correct numerator for each turnover (RM consumed → RM; Factory cost → WIP; COGS → FG).

Reference:

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