Accounting ratios are useful tool to provide information about the financial soundness, strength, position and status of an organization.
Functional Classification of Accounting Ratios: The classification of ratios according to the purpose of its computation is known as functional classification. On this basis ratios are classified as follows:
- Profitability Ratios
- Turnover Ratio or Activity Ratio
- Financial Ratio or Solvency Ratio.
- Market Test Ratios
In this blog, we are going to discuss about the Turnover Ratio or Activity Ratio, their formulas & use.
Turnover Ratio or Activity Ratio: Turnover ratios are used to measure the effectiveness of the employment of resources.
- Capital Turnover Ratio: It shows the efficiency of the capital employed in the business. Higher the ratio greater are the profits.
Capital Turnover Ratio = Net Sales / Capital Employed
- Total Assets Turnover Ratio: This ratio tells about the use of assets. A high Total Assets turnover ratio indicates the overtrading of assets while a low ratio reveals idle capacity.
Total Assets Turnover Ratio = Net Sales /Total Assets
- Stock Turnover Ratio: This ratio measures the efficiency of the use of investment in stock.
Stock turnover ratio = Cost of goods sold/Average Inventory
- Debtors Turnover Ratio = Net Sales / Average Debtors
- Creditors Turnover Ratio: This ratio indicates the speed at which the payments for the credits of creditors are given.
Creditors Turnover Ratio = Credit Purchase / Average Creditors