9.15 Activity Ratios

Hanumant Dhokle

These ratios would explain how good the management of the company is in generating sales from various operations.

(a) Inventory-Turnover Ratio:

This ratio explains how good or bad the management was in managing inventory for generating sales. This is defined as

Inventory
----------------
Net Sales

You can derive the average inventory holding period in a year by multiplying this ratio with the number of days in a year (i.e. 365). For instance, a company with an inventory of Rs 10 crore and net sales of Rs 100 crore would have an average inventory holding period of

10
-------- X 365 = 36.5 days
100

 

(b) Debtors-Turnover Ratio:

 

It explains you how well the company was in collecting receivables from its debtors. This is defined as

Sundry Debtors
--------------------------
Net Sales

You can obtain the average collecting period by multiplying this ratio by 365.

(c) Creditor-Turnover Ratio:

This is defined as

Sundry Creditors
------------------------
Net Sales

 

(d) Working Capital Turnover Ratio:

 

This is defined as

Current Assets – Current Liabilities
-------------------------------------------------------------
Net Sales

 

(e) Interest Turnover Ratio (%):

 

This is defined as

Interest
--------------------- x 100
Net Sales

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