7 Turnover Ratios in 19 Minutes
Turnover ratios, also called efficiency or activity ratios, show how quickly a company uses its assets. They tell you how many times a year inventory is sold, receivables are collected and suppliers are paid, and the first three convert neatly into a number of days.
What you will learn
- How to calculate inventory turnover and days' sales in inventory
- How receivables turnover links to days' sales in receivables
- How payables turnover tells you the average days to pay suppliers
- What total asset turnover says about how hard assets are working
- How inventory, receivables and payables turnover flip into days: 365 ÷ turnover
The formulas
- COGS
- Cost of goods sold for the year
- Inventory
- Inventory on the balance sheet (some courses use the average of opening and closing)
- Sales
- Annual sales (ideally credit sales)
- Accounts receivable
- Money customers still owe the company
- Accounts payable
- Money the company still owes suppliers
- Total assets
- Everything the company owns on the balance sheet
Worked example
A company has sales of $3,650, COGS of $2,190, inventory of $365, receivables of $500, payables of $300 and total assets of $2,920. Find its turnover ratios.
- Inventory turnover = 2,190 ÷ 365 = 6 times; days in inventory = 365 ÷ 6 ≈ 60.8 days
- Receivables turnover = 3,650 ÷ 500 = 7.3 times; days in receivables = 365 ÷ 7.3 = 50 days
- Payables turnover = 2,190 ÷ 300 = 7.3 times; average days to pay = 365 ÷ 7.3 = 50 days
- Total asset turnover = 3,650 ÷ 2,920 = 1.25 times
Answer: Inventory sits about 61 days (rounded), customers pay in 50 days, the company pays suppliers in 50 days, and each $1 of assets generates $1.25 of sales.
Common questions
How do you calculate days sales in inventory?
First find inventory turnover by dividing cost of goods sold by inventory. Then divide 365 by that turnover. If inventory turns over 6 times a year, the average item sits on the shelf for about 365 ÷ 6 ≈ 61 days before it is sold.
Is a high inventory turnover good?
Usually it means goods sell quickly and little cash is tied up on shelves. But a turnover that is far above the industry may mean the company keeps too little stock and risks running out. Compare it with similar businesses before judging.
Should I use ending or average balances in turnover ratios?
Both are used. Many corporate finance textbooks use ending balance sheet figures for simplicity, while accounting and CFA material often uses the average of opening and closing balances. Follow your course, and use the same method when comparing companies.
Why does inventory turnover use COGS instead of sales?
Inventory is recorded at cost, so dividing cost of goods sold by inventory compares like with like. Using sales would mix selling prices with cost figures and overstate how fast inventory moves. Some sources still use sales, so check what your instructor expects.