Turnover Ratios Formula

What is Turnover Ratios Formula?

Turnover ratios measure how efficiently the facilities, including the assets and liabilities of the organization, are utilized. The turnover ratios formula includes inventory turnover ratio, receivables turnover ratio, capital employed turnover ratio, working capital turnover ratio, asset turnover ratio, and accounts payable turnover ratio.

The Inventory turnover ratioInventory Turnover RatioInventory Turnover Ratio is a measure to determine the efficiency of a Company concerning its overall inventory management. To calculate the ratio, divide the cost of goods sold by the gross inventory. read more indicates how efficiently inventory is managed in a particular period.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory.

The Receivables turnover ratio indicates the effectiveness of a company in collecting its debts.

Receivables Turnover Ratio = Credit Sales / Average Accounts Receivable 

The capital employed turnover ratio indicates the efficiency with which a company utilizes its capital employed with reference to sales.

Capital Employed Turnover Ratio = Sales /Average Capital Employed.

Working Capital is the difference between the current assets and current liabilities of a company. Working Capital Turnover RatioWorking Capital Turnover RatioWorking Capital Turnover Ratio helps in determining that how efficiently the company is using its working capital (current assets – current liabilities) in the business and is calculated by diving the net sales of the company during the period with the average working capital during the same period.read more indicates the efficiency with which a company generates its sales with reference to its working capital.

Working Capital Turnover Ratio = Sales / Working Capital

The asset turnover ratio is a measure of a company’s ability to utilize its assets for the purpose of generating revenues.

Asset Turnover Ratio =  Sales/ Average Total Assets.

The accounts payable turnover ratio measures the speed with which a company pays off its suppliers.

Accounts Payable Turnover Ratio =Supplier Purchases / Average Accounts Payable
Turnover-Ratio

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Explanation of the Turnover Ratios

#1 – Inventory Turnover Ratio

In order to calculate the inventory turnover ratio, we should undertake the following steps:

Step 1: We need to calculate the cost of goods sold. The cost of goods sold is computed by adding the beginning inventory to the purchases made during the period and subtracting the ending inventoryEnding InventoryThe ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more for the period.

Cost of Goods Sold = Beginning Inventory + Purchases During the Period – Ending Inventory.

Step 2: The average inventoryAverage InventoryAverage Inventory is the mean of opening and closing inventory of a particular period. It helps the management to understand the inventory that a business needs to hold during its daily course of business.read more should be calculated by using the formula mentioned below:

Average Inventory = Opening Inventory + Closing Inventory/2

Step 3: The inventory turnover ratio is required to be calculated. The result can be obtained by using the formula mentioned below:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

#2 – Receivables Turnover Ratio

In order to calculate the receivables turnover ratio, we should systematically follow the steps mentioned below:

Step 1: Calculate the total credit salesCredit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. read more. Credit Sales are the purchases made by the customers for which payment is given on a later date and is hence delayed.

Step 2: We should compute the average accounts receivable by using the formula:

Average Accounts Receivable = Opening Accounts Receivable + Closing Accounts Receivable /2

Step 3: Calculate the receivables turnover ratio by using the formula mentioned below:

Receivables Turnover Ratio = Credit Sales / Average Accounts Receivable

#3 – Capital Employed Turnover Ratio

Step 1: Calculate the total sales

Step 2: Compute the average capital employed by using the formula mentioned below:

Average Capital Employed = Opening  Capital Employed+Closing Capital Employed/2

Step 3: Calculate the capital employed turnover ratio by using the formula mentioned below:

Capital Employed Turnover Ratio = Sales / Average Capital Employed

#4 – Working Capital Turnover Ratio

In order to calculate the working capital turnover ratio, the following steps are required to be followed:

Step 1: Calculate the total sales. This refers to the total amount of sales conducted by a firm in a given period of time.

Step 2: Calculate the working capital by using the formula mentioned below:

Working Capital = Current Assets – Current Liabilities

Step 3: Compute the working capital turnover ratio by using the formula mentioned below:

Working Capital Turnover Ratio = Sales / Working Capital

#5 – Asset Turnover Ratio

In order to calculate the asset turnover ratio, we should follow the following steps:

Step 1: Find out the sales

Step 2: Calculate the average total assets by using the formula mentioned below:

Average Total Assets = Opening Total Assets + Closing Total Assets / 2

Step 3: Calculate the asset turnover ratio. The formula can be computed as follows:

Asset Turnover Ratio = Sales / Average Total Assets

#6 – Accounts Payable Turnover Ratio

In order to calculate the accounts payable turnover ratio, carry out the following steps:

Step 1: Find out the Supplier Purchases

Step 2: Calculate the average accounts payable. For this purpose, the following formula should be used

Average Accounts Payable = Opening Accounts Payable + Closing Accounts Payable /2

Step 3: In this step, the accounts payable turnover ratio should be calculated by using the formula:

Accounts Payable Turnover Ratio = Supplier Purchases / Average Accounts Payable

Examples of Turnover Ratios Formula

Let’s see some simple to advanced practical examples of turnover ratios to understand it better.

You can download this Turnover Ratios Formula Excel Template here – Turnover Ratios Formula Excel Template

Example #1

Georgia Inc. gives you the following information. From the above information, you are required to calculate the Inventory Turnover Ratio and Asset Turnover Ratio.

  • Cost of Goods Sold: 50000
  • Average Inventory: 5000
  • Sales: 100000
  • Average Total Assets: 20000

Solution

Calculation of Inventory Turnover Ratio

Turnover Formula Example 1.1
  • =50000/5000

Inventory Turnover Ratio will be –

Turnover Formula Example 1.2
  • Inventory Turnover Ratio = 10

Calculation of Asset Turnover Ratio

Turnover Formula Example 1.3

=100000/20000

Asset Turnover Ratio will be –

Turnover Formula Example 1.4
  • Asset Turnover Ratio =5

The Inventory Turnover Ratio is 10, and Asset Turnover Ratio is 5.

Example #2

Credence Inc. gives the following information about its business. Calculate the following a)Capital Employed Turnover Ratio. b) Working Capital Turnover Ratio.

  • Sales: 40000
  • Average Capital Employed: 20000
  • Current Assets: 30000
  • Current Liabilities: 10000

Solution

Calculation of Working Capital

Turnover Formula Example 2.3

=30000-10000

Working Capital will be –

Turnover Formula Example 2.4

Working Capital = 20000

Calculation of Capital Employed Turnover Ratio

Example 2.1

=40000/20000

Capital Employed Turnover Ratio will be- 

Turnover Formula Example 2.2
  • Capital Employed Turnover Ratio = 2

Working Capital Turnover Ratio

Example 2.5

=40000/20000

Working Capital Turnover Ratio will be –

Turnover Formula Example 2.6

Working Capital Turnover Ratio = 2

The Capital Employed Turnover Ratio is 2, and Working Capital Turnover Ratio is 2.

Example #3

Merwin Inc. gives you the following financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more for 2018. Calculate the following efficiency ratios: a) Accounts Payable Turnover Ratio. b) Asset Turnover Ratio. c)Receivables Turnover Ratio.

  • Supplier Purchases: 4000
  • Average Accounts Payable: 1000
  • Credit Sales (all sales are on credit): 100000
  • Average Accounts Receivables: 10000
  • Average Total Assets: 50000

Solution

Calculation of Accounts Payable Turnover Ratio

Example 3.1

=4000/1000

Accounts Payable Turnover Ratio will be –

Turnover Formula Example 3.2
  • Accounts Payable Turnover Ratio = 4

Calculation of Asset Turnover Ratio 

Turnover Formula Example 3.3

=100000/50000

Asset Turnover Ratio will be –

Turnover Formula Example 3.4
  • Asset Turnover Ratio = 2

Calculation of Receivables Turnover Ratio 

Turnover Formula Example 3.5

=100000/10000

Receivables Turnover Ratio will be –

Example 3.6
  • Receivables Turnover Ratio = 10

Relevance and Uses

The inventory turnover ratio indicates the speed at which the company is able to move its inventory. The receivables turnover ratio indicates how fast a company is able to turn its receivables into cash. The capital employed turnover ratio indicates the ability of a company to generate revenues from the capital employed. The higher the working capital turnover ratio, the higher is the efficiency of the company to use its short term assetsIts Short Term AssetsShort term assets (also known as current assets) are the assets that are highly liquid in nature and can be easily sold to realize money from the market. They have a maturity of fewer than 12 months and are highly tradable and marketable in nature.read more and liabilities for the purpose of generating sales.

A low asset turnover ratio indicates that the company is not being efficient in utilizing its assets for the purpose of generating sales. The number of times a company pays off its suppliers during a period is given by the accounts payable turnover ratio.

Turnover Ratios Formula in Excel (with Excel Template)

The Finance Manager of Prudent Inc. is interested in finding out different ratios. Calculate the following ratios assuming all sales are on credit: a)Asset turnover Ratio b) Receivables Turnover Ratio.

The information is as below:

  • Sales: $40000
  • Average Accounts Receivable: $5000
  • Average Total Assets: $20000

Solution

Step 1: Insert the formula =B3/B5 in cell B6 in order to calculate the asset turnover ratio.

Example 4.1

Step 2 : Press Enter to get Result

Example 4.2

Step 3: Insert the formula =B3/B4 in cell B7

4.3

Step 4 : Press Enter to get Result

4.4

The Asset Turnover Ratio is 2, and the Receivables Turnover Ratio is 8.

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