Turnover Ratio or Activity Ratio

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