Turnover Ratios (Teoría)

Financial Ratios - Turnover
Turnover ratios: “How long does it

take the firm to realize receivables
or inventories into cash, or to pay
Receivables
its trade suppliers?”
Receivables Turnover Ratio =
Turnover times per year

The correct figure for sales is net
credit sales, as opposed to total
net sales, as the latter include cash
sales, which do not generate
accounts receivables “AR”
Many companies that sell on credit
terms do so for 100% of their
sales, in which case, net credit
sales = total net sales
The higher the ratio, the faster the
collections pace
Days Receivables = X 360
=
Days This ratio represents the collection period for each company
and should be compared to the average credit terms granted
Receivables by the company. If a company grants terms of 60 days, but is
collecting in 90 days, then the quality of the AR should be
questioned.
Note that these calculations are based on year-end figures for

Trade Receivables, which may mislead the true collections
capacity of the company. It also may miss seasonal effects.
When there is no seasonality, the use of average numbers for

the year would be more precise and would provide the
average collection period for the year. However, It is not
always possible to access monthly or quarterly Balance
Sheet’s “BS”.
Inventory
Turnover
Inventory Turnover =
When we calculate receivables turnover we
measure against sales, whereas inventory
turnover is calculated against cost of sales. Why?
Receivables are literally sales made on a credit
basis, and therefore must be booked at the sales
price. However, inventories have not been sold.
By accounting convention, these are carried on
the balance sheet at cost.
Average monthly figures for inventory are ideal,
but this information is rarely available.
Days Inventory
Days Inventory = X 360
=
Where:
COGS = Initial Inventory + Purchases –
End Inventory
This ratio indicates how many days a
company can operate without production
Days Inventory (Cont.)
The type of inventory needs to be considered in the analysis. For an
industrial company, this is important as the cost element is different.
Finished goods are valued at COGS (raw material, labor, and

overhead), but raw materials are valued at purchase cost (or market,
whichever is lower).
This means that if inventory is composed mostly of finished goods,

the traditional calculation can be quite accurate. If the inventories are
essentially Raw Material “RM”, the following calculation may be more
appropriate:
Days Inventory = X 360 =

Where: RM purchase cost = Initial RM + RM Purchases – End RM
However, this is not the formula calculated by bank spreadsheets

because the Income Statement (IS) normally does not indicate the
amount of annual purchases of RM.
Commercial and Working Capital “WC” intensive companies:
High inventory
Transport and service companies: Low inventory
Seasonality effects are also important to correctly interpret

the days inventory figure at the BS date.
There are no easy answers to enable precision in judging the
Days appropriate level of inventory for a company. The analyst

should get a feeling for what is appropriate from
management and then look at similar firms for comparison.
Inventory From a financial perspective, the less inventory the better,

due to carrying and financing costs.
(Cont.) Reasons for a higher inventory includes protection against

inflation, access to volume discounts on purchases, or fix a
lower Foreign Exchange “FX” rate.
Selling methodology also has an impact on inventory levels.

Does the firm sell on a specific contract basis (little inventory
needs) or does it sell from stock (higher inventory needs)?
Payables
Turnover
Payables Turnover= times per year
When we calculate payables turnover we

measure against purchases, since purchases
generate Accounts Payables “AP” (also known as
Trade Payables).
The lower the turnover ratio, the longer credit

terms offered by the suppliers to the buyers.
Days Payable
Days Payables = X 360 =
The figure for days payable represents the

average payment period for the company. To be
compared to the average credit terms received.
Because purchases are normally not specified in

the IS, COGS is commonly used as a best
estimate.
While for a commercial firm this distinction is not

relevant (where Purchases ≈ COGS as there is no
processing of the goods), it is significant for an
industrial firm.
Seasonality effects are also important to
correctly interpret the days payable figure at
the BS date.
The higher the days payable, the better from

a funds flow perspective. However, if the
numbers for this ratio are too high, this may
Days Payable indicate delayed payment to suppliers.
(Cont.) Conversely, a low number should also raise

concerns as to why this usually cheaper
source of funding is not being maximized.
The days payable number is often analyzed in

tandem with days receivable and days
inventory, in order to estimate the WC
requirements for a company.
Asset Turnover =
This ratio provides an indicator of the efficiency with

which assets are being utilized in the business. The
Sales to higher the ratio the more sales are achieved with a
given amount of asset resources.
Assets It is best calculated against average total assets;
Turnover
however, bank spreadsheets usually calculate against
end-of-period assets.
Ratio Companies probably experience relatively little

fluctuation in this ratio from year to year. Companies
that need a great deal of fixed assets will have low
ratios, and viceversa.
Es un indicador que expresa la cantidad de tiempo, en
días, que le toma a una empresa convertir las
CICLO DE materias primas en flujos de efectivo provenientes de
las ventas
EFECTIVO
Ciclo de Efectivo (CDE) = Días Clientes + Días
Inventarios – Días Proveedores
¿PARA QUÉ SIRVE EL CICLO DE EFECTIVO?
● Evaluar la calidad de la gestión de
tesorería
● Diseñar políticas relacionadas con
las compras y ventas a crédito y
del tiempo de inventario
Casos del CDE:

● Positivo: El pago a proveedores se
realiza antes de cobrar las ventas
● Cero: El pago a proveedores se
realiza el mismo día en que se
cobran las ventas
● Negativo: El pago a proveedores
se realiza después de cobrar las
ventas
Interactive analysis
Inventory turnover
https://s3.amazonaws.com/he-assets-prod/inter
actives/180_inventory_turnover/Launch.html
Efficiency ratios
actives/168_efficiency_ratios/Launch.html
Cash conversion cycle


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Financial Ratios - Turnover

Turnover ratios: “How long does it

Turnover times per year

Note that these calculations are based on year-end figures for

When there is no seasonality, the use of average numbers for

Finished goods are valued at COGS (raw material, labor, and

This means that if inventory is composed mostly of finished goods,

Days Inventory = X 360 =

However, this is not the formula calculated by bank spreadsheets

Seasonality effects are also important to correctly interpret

There are no easy answers to enable precision in judging the

Days appropriate level of inventory for a company. The analyst

Inventory From a financial perspective, the less inventory the better,

(Cont.) Reasons for a higher inventory includes protection against

Selling methodology also has an impact on inventory levels.

When we calculate payables turnover we

The lower the turnover ratio, the longer credit

The figure for days payable represents the

Because purchases are normally not specified in

While for a commercial firm this distinction is not

The higher the days payable, the better from

(Cont.) Conversely, a low number should also raise

The days payable number is often analyzed in

This ratio provides an indicator of the efficiency with

Assets It is best calculated against average total assets;

Ratio Companies probably experience relatively little

Casos del CDE:

Cash conversion cycle

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