Activity Ratio or Turnover Ratio
Table of Contents
Activity ratios measure the efficiency of Asset management. The efficiency in the use of assets would be reflected by the speed with which they are converted into sales. Activity ratios indicate the relationship between sales and various assets of the company.
Capital Turnover Ratio
Formula
Capital turnover ratio = Cost of goods sold or sales/Capital employed
or
Fixed assets turnover ratio = Cost of goods sold or sales/Fixed/Capital employed
Inventory (Stock) Turnover
This ratio indicates the number of times stock is turned over during a year. A high ratio indicates Quick movement of stock and vice versa.
Formula
Stock Turnover Ratio = Cost of goods sold/ Avg. inventory at cost
or
Stock Turnover Ratio = Net Sales/ Average inventory at cost
or
Average Stock = Openings stock + Closing Stock/2
Cost of goods sold
1) In case of Trading concern
Cost of goods sold = {opening stock + Purchase + Direct expenses} – Closing Stock
2) In case of manufacturing concerns
Cost of goods sold = {Total cost + Opening stock of finished goods} – Closing stock of finished goods
Total Cost = Raw materials consumed + Labor cost + O/H cost
3) In all cases where Gross profit is known