Turnover ratio indicate the efficiency with which the firm utilised the asset or resources at its disposal to generate sales revenue or turnover.
This ratio includes:
a) Stock/inventory turnover = Cost of Sales
The ratio indicate number of times the stock was turned into sales in a year i.e how many times did the ‘buy-sell’ process occur during the year. The higher the stock turnover, the better the firm and more likely the higher the sales.
b) Stock holding period = 365 days
= 365 x Average stock i.e 365
Cost of sales Stock turnover
The ratio indicates number of days the stock was held in the warehouse before being sold.
The higher the stock turnover, the lower the stock holding period and vice versa.
c) Debtors/accounts receiver turnover = Annual credit sales
The ratio indicate the number of times/frequency with which credit customers or debtors were turned into sale i.e the number of times they come to buy on credit per year after paying their dues to the firm.
The higher the debtors turnover the better the firm indicating that customers came to buy on credit many times thus they paid within a short period.
d) Debtors collection period = 365
or 365 x Average debtors
Annual credit sales
This refers to credit period that was granted to the debtors on the period within which they were supposed to pay their dues to the firm.
The shorter the collection period/credit period the higher the debtors turnover and vice versa.
If no opening debtors are given use the closing debtors to represent average debtors.
e) Creditors/accounts payable turnover = Annual credit purchases
The firm buy goods on credit from suppliers.
The ratio indicate number of times p.a. the firm bought goods on credit after paying the suppliers.
If the creditors turnover is high, this indicates that the payment was made
within a short period of time.
f) Creditors payment period = 365
= 365 x Average creditors
Annual credit purchases
The ratio indicate the credit period granted by the suppliers i.e. the period
within which the firm should pay its liabilities to the suppliers.
The shorter the period the higher the creditors turnover and vice-versa.
g) Fixed asset turnover = Annual Sales
This ratio indicate the efficiency with which, the fixed assets were utilised to generate sales revenue e.g. a ratio of 1.4 means one shilling of fixed assets was utilised to generate Sh.1.4 of sales.
h) Total asset turnover = Annual sales
The ratio indicate amount of sales revenue generated from utilisation of one shilling of total asset.