Working Capital Ratios

Ratio Description

Formula

Inventory turnover ratio /

Days Inventory in Hand

Inventory turnover is an efficiency ratio which measures business’ efficiency based on number of times it is able to repeat its inventory production to sale cycle.

A higher inventory turnover would represent highly efficient business; however, inventory turnover may vary from industry to industry and should be compared with similar industry.

Alternatively, this ratio can be presented in terms of number of days inventory is in hand before being sold.

Inventory turnover =

Cost of goods sold
Average inventory balance

In absence of detailed data, average inventory is calculated as simple average of opening and closing inventory balance.

 

Days Inventory in hand =

     365                  
Inventoryturnover ratio

Accounts Receivable Turnover /

Days Sales outstanding

 

Accounts receivable turnover ratio measures number of times a business collects its average receivable balance. (Higher the better)

Alternatively, it can also be presented as Days Sales Outstanding which calculates number of days a credit sale remains outstanding. (Lower the better)

Accounts receivable turnover =

credit sales during period
Avg. accounts receivable balance

Days sales outstanding =
     365                  
Accounts receivable turnover

Accounts Payable Turnover /

Days payable outstanding

 

Accounts payable turnover ratio represents the short term liquidity position of a business as it measures number of times a business is able to make payments to its suppliers against its average payable balance. (Higher the better)

Alternatively, it can also be presented as Days Payable Outstanding which calculates number of days a credit purchase remains outstanding. (Lower the better)

Accounts payable turnover =

Credit purchases during period
Avg. accounts payable to suppliers

 

Days sales outstanding =

     365                  
Accounts payableturnover

 

Example:

Based on data above, solvency ratios would be as follows:

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