ACTIVITY RATIOS As the term itself speaks, the various activities of a firm should aim at maximizing the overall

objective of the company. So the firm has to ensure that all the activities should be efficiently managed, properly supported by the assets or resources. In other words, it can be said that there should be optimum and efficient utilization of the assets or all resources of the firm, leading to more profitable activities. These ratios are also called turnover ratio because they indicate the speed with which assets are converted or turned over into sales. The various ratios to be discussed under this head are follows : 1) 2) 3) 4) 5) 6) Debtors Turnover Ratio Creditors Turnover Ratio Inventory Turnover Ratio Working Capital Turnover Ratio Fixed Assets Turnover Ratio Proprietary Ratio

1) Debtors Turnover Ratio:

Net Credit Sales a) Debtor Turnover Ratio: --------------------------------Average Debtors Net Credit Sales = Total Sales Cash sales Sales Return Average Debtors = Simple average of debtors at the beginning and at the end of the year. (Opening Debtors + Closing Debtors) = ---------------------------------------------------------2

b) Average Collection Period :

No. of days in a year ----------------------------------Debtor Turnover Ratio

General Interpretation: - Debtors Turnover Ratio is calculated to comment upon the liquidity/efficiency with which the liquid resources are being used by the firm. - A high Debtors ratio indicates less credit time allowed by the firm to its clients and it is good and the vice versa. - Average Collection period shows the velocity of debt collection of a firm. It also shows the number of times the average debtors (receivables) are turned over during a year.

2) Creditors Turnover Ratio:

Net Credit Purchases a) Creditors Turnover Ratio: --------------------------------Average Creditors Net Credit Purchase = Total Purchase Cash Purchase Return Average Creditors = Simple average of Creditors at the beginning and at the end of the year. (Opening Creditors + Closing Creditors) = ---------------------------------------------------------2 b) Average Payment Period: No. of days in a year ----------------------------------Creditors Turnover Ratio

General Interpretation: - A low Credit Turnover Ratio shows a better picture as it may point out the high credit period enjoyed by the firm from the suppliers and similarly vice versa - Average payment period should be compared with Average collection period. If the former is less than the later, then it is not good for the company as the company may be allowing more credit period to it clients then the credit period allowed by the suppliers to the firm.

3)Inventory Turnover Ratio:

Cost of Goods sold a) Inventory Turnover Ratio: --------------------------------Average Inventory Cost of Goods Sold = Total Net Sales Gross Profit Or (Opening Inventory + Purchase + Direct Exp. Closing Inventory) Average Inventory = Simple average of Inventory at the beginning and at the end of the year. (Opening Inventory + Closing Inventory) = ---------------------------------------------------------2 No. of days in a year b) Inventory Conversion Period : ----------------------------------Inventory Turnover Ratio

General Interpretation: -This ratio shows how fast the inventory can be sold. Actually inventory is always seen as less liquid able item and it costs the company. Japanese Company like Toyota discovered Just in Time approach to reduce the inventory cost. - A high inventory ratio is good from the point of view of better and quick utilization of inventory. - A low inventory ratio represents that inventory is slow moving and costs the company in the form of carrying cost i.e. salary of stores persons, lighting, rent, insurance etc.

4) Working Capital Turnover Ratio: Cost of Goods Sold Working Capital Turnover Ratio: ----------------------------------Average Working Capital or

Cost of Goods Sold ----------------------------------Net Working Capital

Working Capital (Net) = Current Assets Current Liabilities Average Working Capital (WC) = Simple average of Inventory at the beginning and at the end of the year. (Opening WC + Closing WC) Or ---------------------------------------------2

General Interpretation: -The ratio shows the number of times the working capital is turned over in the course of the year. -This ratio measures the efficiency with which the working capital is being used by a firm. - A higher ratio shows efficient working capital and low ratio indicates otherwise.

5)Fixed Assets Turnover Ratio: Net Sales Fixed Assets Turnover Ratio = ---------------------------Fixed Assets Or General Interpretation: - This ratio shows the extent to which the investment in fixed asset contributes to sales. - A higher ratio shows fixed assets are properly utilized. Cost of Goods Sold -------------------------------Average Fixed Assets

6) Proprietary Ratio: Shareholders Funds Proprietary Ratio: ----------------------------------------Total Assets General Interpretation: - This ratio represents out of rupee one of shareholders funds, how much has been invested in assets. In other words, company aims at maximum amount of shareholders funds should be utilized against fixed assets. Lower (less than 1) ratio may point out towards more of borrowing by the company.