Turnover ratio is the term used in the context of financial ratios; these ratios measure the efficiency on the part of the company with regard to the use of the resources available with the company. There are many types of turnover ratios, let’s look at some of them –
- Debtors or Accounts Receivables Turnover Ratio – It measures how effectively the company is collecting the cash from its creditors for goods sold on credit by the company. A high ratio would indicate that company is able to collect cash from its creditors quickly and a low ratio would imply that company needs some work as far as collection department is concerned. It can be calculated as – Net credit sales/ Average accounts receivables of the company.
- Creditors or Accounts Payable Turnover Ratio – It measures how quickly the company pays its creditors for goods purchased by the company on credit. A high ratio would indicate that company is paying its creditors quickly while a lower ratio would imply that company is not able to pay creditors on time which in turn will indicate worsening financial position of the company. It can be calculated as – Net credit purchase /Average accounts payable of the company.
- Working Capital Turnover Ratio – Working capital which is calculated as current assets – current liabilities is used while calculating ratios also; the working capital turnover ratio is calculated to ascertain how well company is using its working capital for generating sales for the company. It can be calculated as – Net sales/ Average working capital, a higher ratio will indicate that company is using its working capital efficiently and a lower ratio will imply that company is not able to use the working capital to fullest extent.
- Fixed Assets Turnover Ratio – It measures the company capability to generate sales from its fixed assets investments. It is calculated as – Net sales/ gross fixed asset – accumulated depreciation, a higher ratio would imply that company is using fixed asset to general more sales while a lower ratio would imply that company has been inefficient in using the fixed assets.
- Current Assets Turnover Ratio – It is calculated as Net sales/ current assets of the company, it signifies the total sales done by the company with an investment in the current asset. A higher ratio implies that company has been successful in utilizing the current assets; current assets include cash, stocks, debtors, prepaid expense and so on.
- Inventory Turnover Ratio – It is used to calculate the number of times the inventory or product of the company is sold during a year. It is calculated as Cost of goods sold/ Average stock. A higher ratio would indicate that company is able to sell its products quickly and the company is maintaining less dead stock whereas a lower ratio would imply that has not been efficient in its work due to which unnecessary funds are locked up in stocks which could have been used elsewhere.
As one can see from the above there are many types of turnover ratios and an individual analyzing these ratios should take care to analyze all ratios together rather than forming an opinion about the company on the basis of only one ratio.