What are the types of turnover ratios? Explain with formula and example?

 

There are several types of turnover ratios that are used to measure the efficiency of a company in using its assets, inventory and capital. Some of the most commonly used turnover ratios are:

Asset Turnover Ratio: 

It measures the efficiency of a company in using its assets to generate revenue. The formula is: 

Asset Turnover Ratio = Net Sales/Total Assets

Example: If a company has $500,000 in net sales and $1,000,000 in total assets, the Asset Turnover Ratio is 0.5.

Inventory Turnover Ratio: 

It measures how many times a company's inventory is sold and replaced over a given period. The formula is: 

Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory

Example: If a company's cost of goods sold is $200,000 and its average inventory is $100,000, the Inventory Turnover Ratio is 2.

Accounts Receivable Turnover Ratio: 

It measures the efficiency of a company in collecting its accounts receivable. The formula is: 

Accounts Receivable Turnover Ratio = Net Credit Sales/Average Accounts Receivable

Example: If a company's net credit sales are $300,000 and its average accounts receivable is $150,000, the Accounts Receivable Turnover Ratio is 2.

Fixed Asset Turnover Ratio: 

It measures the efficiency of a company in using its fixed assets to generate revenue. The formula is: 

Fixed Asset Turnover Ratio = Net Sales/Net Fixed Assets

Example: If a company has $600,000 in net sales and $300,000 in net fixed assets, the Fixed Asset Turnover Ratio is 2.