## Turnover / Activity / Performance Ratios

These ratios — also called velocity ratios — measure how efficiently a firm uses its assets and manages its working capital cycle to generate sales. A higher turnover generally means better asset utilisation.

### 1. Raw Material Turnover Ratio

Formula: = Cost of Raw Material Consumed / Average Stock of Raw Material — in Times

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

### 2. WIP Turnover Ratio

Formula: = Factory Cost / Average Stock of WIP — in Times

Factory Cost = Materials Consumed + Direct Wages + Production Overhead

### 3. Finished Goods / Stock Turnover Ratio

Formula: = Cost of Goods Sold / Average Stock of Finished Goods — in Times

COGS (Manufacturers) = Opening FG + Cost of Production − Closing FG
COGS (Traders) = Opening FG + Cost of Goods Purchased − Closing FG
Average FG = (Opening + Closing FG) / 2
High turnover = fast-moving goods; Low turnover = possible dead stock or over-stocking.

### 4. Debtors Turnover Ratio ★

Formula: = Credit Sales / Average Accounts Receivable — in Times

Average A/R = (Opening + Closing Debtors & Bills Receivable) / 2
Debtor Collection Period = 365 (or 360) / Debtors Turnover = days to collect credit sales
Equivalently: (Average Debtors / Credit Sales) × 365

### 5. Creditors Turnover Ratio

Formula: = Credit Purchases / Average Accounts Payable — in Times

Average A/P = (Opening + Closing Creditors & Bills Payable) / 2
Creditor Payment Period = 365 / Creditors Turnover

### 6. Working Capital Turnover Ratio

Formula: = Net Sales / Net Working Capital — in Times

NWC = Current Assets − Current Liabilities
Measures sales generated per rupee of working capital.

### 7. Fixed Assets Turnover Ratio

Formula: = Net Sales / Net Fixed Assets — in Times

### 8. Capital Turnover Ratio

Formula: = Net Sales / Capital Employed — in Times

Capital Employed = Equity + Long-term Debt (Liability Route) = Net Fixed Assets + NWC (Asset Route)
Central component of Du Pont analysis.

### Velocity / Collection / Payment Periods (summary)

Debtors Collection Period = (Debtors & B/R / Credit Sales) × 12 months (or × 365 days)
Creditors Payment Period = (Creditors & B/P / Credit Purchases) × 12 months (or × 365 days)
Stock Holding Period = (Average Stock / COGS) × 12 months (or × 365 days)

Worked example

### Example 1

Example 1 – FM Ltd.: Finding Financial Figures from Ratios (from Question 1)

Given: GP Ratio = 25%; Gross Profit = ₹12,00,000; Stock Turnover (on COGS) = 1.5; Debtors Velocity = 3 months; Creditors Velocity = 2 months; Fixed Assets Turnover (on COGS) = 4; Bills Receivable = ₹75,000; Bills Payable = ₹30,000; Closing Stock = Opening Stock + ₹30,000. (All sales and purchases on credit)

Step 1 – Sales and COGS

Sales = GP / GP% = 12,00,000 / 0.25 = ₹48,00,000

COGS = 48,00,000 − 12,00,000 = ₹36,00,000

Step 2 – Sundry Debtors

Average A/R (Debtors + B/R) = (3/12) × Credit Sales = 0.25 × 48,00,000 = ₹12,00,000

Sundry Debtors = 12,00,000 − 75,000 (Bills Receivable) = ₹11,25,000

Step 3 – Closing Stock

Average Stock = COGS / Turnover = 36,00,000 / 1.5 = ₹24,00,000

Let Opening Stock = x → Closing Stock = x + 30,000

(x + x + 30,000) / 2 = 24,00,000 → 2x = 47,70,000 → x = ₹23,85,000

Closing Stock = ₹24,15,000

Step 4 – Sundry Creditors

Purchases = COGS + Closing FG − Opening FG = 36,00,000 + 24,15,000 − 23,85,000 = ₹36,30,000

Average A/P (Creditors + B/P) = (2/12) × 36,30,000 = ₹6,05,000

Sundry Creditors = 6,05,000 − 30,000 (Bills Payable) = ₹5,75,000

Step 5 – Fixed Assets

Fixed Assets = COGS / Fixed Assets Turnover = 36,00,000 / 4 = ₹9,00,000

### Example 2

Example 2 – Average Collection Period from Inventory Turnover (from Question 11)

Given: Average Inventory = ₹3,60,000; Debtors = ₹2,40,000; Inventory Turnover = 6 times; GP Ratio = 10%; Credit Sales = 80% of Total Sales. (360-day year)

Step 1 – COGS from Inventory Turnover

COGS = Average Inventory × Turnover = 3,60,000 × 6 = ₹21,60,000

Step 2 – Total Sales

Sales = COGS / (1 − GP%) = 21,60,000 / 0.90 = ₹24,00,000

Step 3 – Credit Sales

Credit Sales = 80% × 24,00,000 = ₹19,20,000

Step 4 – Average Collection Period

Debtors Turnover = Credit Sales / Debtors = 19,20,000 / 2,40,000 = 8 times

Collection Period = 360 / 8 = 45 days

⚠️ Common exam mistakes

Using total sales instead of credit sales in the Debtors Turnover Ratio — only credit sales create debtors.
Using sales instead of COGS for Stock Turnover when the problem specifies COGS as the base — always read which base is stated.
Forgetting to include Bills Receivable with Debtors, or Bills Payable with Creditors, in the respective average figures.
Using only the closing balance when both opening and closing figures are available — the ratio requires the average.
Using sales in the Creditors Turnover Ratio instead of credit purchases — creditors arise from purchases, not sales.
In velocity problems, dividing (velocity/12) × sales for creditors instead of purchases.

Reference:

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