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.

Stock turnover ratio=
Cost of goods sold
Average stock at cost price

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.

Asset turnover ratio=
Sales turnover
Total assets-current liabilities

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.

Debtors days=
Total Debtors
X 360
Total Sales turnover

Trade creditor payment period (Creditors Days)

This ratio indicates how the company uses short term financing to fund its activities.

Creditors days=
Total Creditors
X 360
Cost of sales

Both these ratios are useful for intra-firm comparison.


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