These ratios state how efficiently certain areas of the business are performing.
Stock turnover ratio
It indicates the number of times in a year the average stock can be sold off. The more times the stock is sold the more efficient the business.
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Stock turnover ratio= |
Cost of goods sold
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Average stock at cost price
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Average Stock is calculated as (Opening stock + Closing stock)/2
Asset turnover ratio
Asset turnover is a measure of how effectively the assets are being used to generate sales. It is one of the ratios that would be considered when interpreting the results of profitability ratio analyses like ROCE.
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Asset turnover ratio= |
Sales turnover
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Total assets-current liabilities
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If the asset turnover is high than its competitors, it shows as an over investment in assets.
However, a new firm may have a higher asset turnover ratio than its competitors as the assets are newer and have a higher value. Moreover, some firms may use a lower rate of depreciation than its competitors.
In some cases, firms may purchase assets whereas its competitors firms are leasing assets.
Trade debtor collection period (Debtors days)
This ratio indicates how efficient the company is at controlling its debtors.
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Debtors days= |
Total Debtors
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X 360
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Total Sales turnover
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Trade creditor payment period (Creditors Days)
This ratio indicates how the company uses short term financing to fund its activities.
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Creditors days= |
Total Creditors
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X 360 |
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Cost of sales
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Both these ratios are useful for intra-firm comparison.