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

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

-------- X 365 = 36.5 days


(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

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

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