Activity/ Performance/ Turnover Ratios

Activity Ratios refers to Ratios, which measures the level of activities, the performance or the
operating efficiency of an enterprise. They may be defined as the test of relationship between sales &
various assets of the firm. Several Activity Ratios are calculated to judge the effectiveness of asset
utilization.
The important Activity Ratios are
1. Inventory/ Stock Turnover Ratio
2. Receivable/ debtors Turnover Ratio/ debtors Velocity
3. Creditors Turnover Ratio/ creditors Velocity
4. Cash Turnover Ratio/ Cash Velocity
5. Assets Turnover Ratio/ Investment Turnover Ratio
6. Sales to net worth Ratio
7. Working Capital Turnover Ratio
1. Inventory Turnover Ratio
This is the ratio, which indicates the number of times the stock is turned over during the year. This
ratio indicates the efficiency of the firm in selling its products. It is the ratio between stock & cost of
goods sold.
Expression

Average Stock =

Cost of Goods Sold

Average Stock/ Inventory

Opening Stock of
Closing Stock of
finished goods
+ finished goods
2

Cost of Goods Sold = Opening stock of goods+ manufacturing cost

(including purchases) - closing stock.
Interpretation
A stock turn over Ratio of 8 times a year is considered ideal. The ratio higher than the ideal rate
indicates the efficient sales of the concern i.e., the business is expanding & lower ratio indicates the
inefficient in sales of the products i.e., business is not prosperous.
The manufacturing firms inventory consists two more components viz.
(a) Raw Materials
(b) Work-in-progress

To know the levels of raw materials involved in inventory & work-in-progress inventory held by
the firm on coverage, the following two ratios are helpful.
(a) Raw Materials Inventory TOR

(b) Work-in-progress TOR Ratio

= Cost of raw materials used

Average Raw Material Inventory
=

Cost of Goods manufactured

Average work-in-progress Inventory

2. Debtors Turnover Ratio

It is the ratio, which indicates the relationship between debtors & sales. It is the ratio, which indicates
the number of times the debts collected in a year.
Expression:

Debtors

Average Debtors

Net Credit Sales

Average Debtors
Sundry debtors + Bills Receivable
=

Opening Debtors + Closing Debtors

2

Debt Collection Period

This indicates the average time taken by the firm to collect debts.
Expression:

Months/ Days in a year

Debtors TOR Ratio

Interpretation
If the actual period of credit allowed is more than the normal period of credit or ideal period of credit
(30 days) the indication is that credit collection is not efficient. In the adverse case, it is the indication of
efficient credit collection.
3. Creditors Turnover Ratio
This is the Ratio between creditors & purchasers. It is the Ratio, which indicates the number of times
the creditors are paid in a year.
Expression:
Creditors
Average creditors =

Net Credit Purchases

Average creditors
=
sundry creditors + bills payable.
Opening creditors + Closing crs
2

Debt Payment Period

This indicates the time with in which the payments are made to creditors.

Expression:

Days/ Months in a Year

Creditors TOR Ratio

Interpretation
If the actual period of credit received from creditors is less than 30 days (ideal time), it indicates that
sufficient period of credit has not been received from creditors. In the adverse case, it indicates that the
concern has received sufficient period of credit from the creditors.
4. Cash TOR Ratio
This is the ratio between cash & turnover or sales
Expression:
Cash

Net Annual Sales

Cash
cash in hand + cash at bank & readily realizable investments

Or securities
Net Sales = Sales Sales Returns.
Interpretation
Ideal Cash TOR Ratio is 10:1. The Actual Ratio equal or more than the ideal ratio indicates the
effective utilization of the cash resources, & vice versa in adverse case.

5. Assets Turnover Ratio

This represents the relationship between sales & assets. Several assets TOR Ratio can be calculated as
follows

Total Asset TOR Ratio

Fixed Asset TOR Ratio

Current Asset TOR Ratio

Asset TOR Ratio

This is the ratio between total assets or turn over or sales

Expression:

Net Sales
Total Assets

Interpretation
The ideal Total Asset TOR Ratio is that the sales should be at least two times the value of the assets
(2:1). The actual Ratio more than the ideal Ratio indicates that the assets of the concern are utilized
effectively & vice versa in adverse case.

Fixed Asset Turnover Ratio

This is ratio between fixed asset & turnover

Expression:
Net Sale

Net Sales
Fixed Assets (net)
= Sales Returns

Fixed Assets = Fixed Assets Depreciation

Interpretation
Ideal ratio is 5:1 the actual ratio equal or more than the ideal ratio indicates the better utilization of
fixed assets & vice versa in adverse case.

Current Assets TOR Ratio

This is the between current assets & turn over

Expression:

Net Sales
Current Assets

Interpretation
There is no ideal ratio. Yet the interference is that a high Current TOR Ratio is an indication of better
utilization of current assets & vice versa in adverse cases.
6. Sales Net worth Ratio
This is the ratio between sales & net worth (owners fund)
Expression:

Net Sales
Current Assets

Interpretation
If the volume of sales in relation to net worth is reasonable, it indicates that the owners funds have
been effectively utilized.
7. Working Capital Turnover Ratio
This is the ratio between working capital & turnover
Expression:

Net Sales
Working Capital

Interpretation
Higher Working Capital TOR Ratio indicates the efficiency & low ratio indicates the inefficiency
of the management in the utilization of working capital.