Concept And Types Of Turnover Ratios

Turnover ratios are also known as activity or efficiency ratios. The total fund raised by the company are invested in acquiring various assets for its operations. The assets are acquired to generate the sales revenue and the position of profit depends upon the value of sales. Turnover ratios establish the relationship of sales with various assets. Turnover ratios are expressed in integers or times rather than as a percentage or proportion. The turnover ratios are mostly computed to measure the efficiency.

Types Of Turnover Ratios
1. Inventory turnover ratio
2. Debtors turnover ratio
3.Average collection period
4. Total assets turnover ratio
5. Fixed assets turnover ratio
6. Capital employed turnover ratio

1. Inventory Turnover Ratio
Inventory turnover ratio is also known as stock turnover ratio.Inventory turnover ratio shows the relationship between the cost of good sold and the average inventory. This ratio measures how frequently the company's inventory turned into sales. This ratio is calculated by using the following formula.
Inventory turnover ratio = Cost of good sold/Average stock = ........... times.
In the absence of the cost of good sold and average stock, the following formula can be used to calculate inventory turnover ratio.
Inventory turnover ratio = Sales/Closing Inventory = .......... times.

* Cost Of Good Sold = Opening stock+ Purchases+Carriage inward+Direct wages and expenses- Closing Stock
* Cost Of Good Sold =Sales - Gross profit
* Average stock = (Opening stock + closing stock)/2

2. Debtors Turnover Ratio
Debtors turnover ratio is also called receivable turnover ratio. This ratio establishes the relationship between net credit sales and average debtors for the year. Debtors turnover ratio shows how quickly the credit sales of the company have been converted into cash. This ratio can be calculated by using the following formula

Debtors Turnover Ratio = Net credit sales/Average account receivable

* The term account receivable includes 'trade debtors and bills receivable'.

3. Average Collection Period

Average collection period is also called debt collection period or average age of debtors and receivables. It indicates how long it takes to realize the credit sales or debtors and receivables. Average collection period also measures the average credit period enjoyed by the customers. It indicates the average time lag between credit sales and their conversion into cash. This ratio is calculated by using following formula.
Average Collection Period = Days in a year/debtors turnover ratio= ......... days.
Or,
Average Collection Period =(Average debtors/Credit Sales)Days in a year= .... days.

4. Total Assets Turnover Ratio
Total assets turnover ratio shows the relationship between total assets and sales. Total assets turnover ratio indicates how well the firm's total assets are being used to generate its sales. This ratio is obtained by using the following formula.
Total Assets Turnover ratio = Net Sales/Total Assets

5. Fixed Assets Turnover Ratio

Fixed assets turnover ratio is also termed as the ratio of sales to fixed assets. Fixed assets turnover ratio indicates how efficiently the fixed assets are used. It measures the efficiency with which the firm has been using its fixed assets to generate sales. This ratio is calculated in the following manner.

Fixed Assets Turnover Ratio = Sales/ Net fixed assets.

6. Capital Employed Turnover Ratio
Capital employed turnover ratio establishes the relationship between the amount of sales and capital employed. It shows how efficiently capital employed in the company has been utilised in generating sales revenue. This ratio is calculated by using following formula.

Capital Employed Turnover Ratio = Sales/Capital employed