Activity (turnover) ratios

Activity (turnover) ratios show how efficiently the firm uses its resources: how fast stock is sold, and how fast money is collected and paid.

• Inventory turnover = cost of revenue from operations ÷ average inventory. Cost = revenue − gross profit, or opening inventory + purchases + direct expenses − closing inventory. Average inventory = (opening + closing) ÷ 2.
• Trade receivables turnover = net credit revenue ÷ average trade receivables (debtors + bills receivable, before the provision for doubtful debts). Collection period = days in the year ÷ turnover.
• Trade payables turnover = net credit purchases ÷ average trade payables (creditors + bills payable). Payment period = days ÷ turnover.
• Net assets turnover = revenue ÷ capital employed; fixed assets turnover = revenue ÷ net fixed assets; working capital turnover = revenue ÷ working capital.

If only the year-end figures are given, use them in place of the average.

Example: revenue 6,00,000, gross profit 25% on revenue, average inventory 50,000. Cost = 6,00,000 − 1,50,000 = 4,50,000; inventory turnover = 4,50,000 ÷ 50,000 = 9 times.

A collection period much longer than the credit terms the firm gives (say 70 days against 45-day terms) is a poor sign.