9.15 Activity Ratios
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