Know more about types of turnover ratio
The turnover ratio shows how efficiently any company uses its assets to generate sales. It is also known as the efficiency ratio where sales play an important role in the calculation while it is taken differently for every turnover ratio. It is expressed in integers or times rather than as a percentage.
Types of turnover ratio -
Receivables turnover ratio: Only credit sales convert to accounts receivables; hence, only credit sales are considered. This formula shows the conversion of debtors/credit sales into cash.
Receivables turnover ratio = Credit sales/accounts receivable
Inventory turnover ratio: This means how many times the inventories are restored during the year and how efficiently is the inventory used by any company.
Inventory turnover ratio = Cost of goods sold/inventory
where the cost of goods sold = Beginning inventory + purchases during the period – ending inventory
Asset turnover ratio: This ratio is a comparison of sales to total assets and provides an indication of how efficiently the assets are being utilised to generate sales.
Asset turnover ratio = Total sales/assets
Fixed asset turnover ratio: This ratio reflects utilisation of fixed assets like property plants and equipment or machinery. It indicates how efficiently the fixed assets are being utilised to generate sales.
Fixed asset turnover ratio = Total sales/net fixed assets
Capital employed turnover ratio: This ratio shows how efficiently capital employed in the company has been utilised in generating sales.
Capital employed turnover ratio = Total sales/capital employed
Similarly, a turnover ratio that includes credit purchases and creditors' amount i.e. accounts payable can also be calculated.
Payables turnover ratio: This ratio indicates the number of times that payables are rotated during the period. Only credit purchases convert to accounts payables; hence, only credit purchases are considered. This formula shows the conversion of creditors/credit purchases into cash.
Payables turnover ratio = Purchases/accounts payable