AGENDAAGENDA

ACTIVITY RATIOSACTIVITY RATIOS

MEANING:MEANING:

Accounting ratios that measure a firm's ability to convert different accounts within Accounting ratios that measure a firm's ability to convert different accounts within their balance sheets into cash or sales.their balance sheets into cash or sales.

DISCRIPTION:DISCRIPTION:

Companies will typically try to turn their production into cash or sales as fast as Companies will typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues. possible because this will generally lead to higher revenues. 

EXXAMPLE:EXXAMPLE:

Such ratios are frequently used when performing fundamental analysis on different Such ratios are frequently used when performing fundamental analysis on different companies. The asset turnover ratio and inventory turnover ratio are good companies. The asset turnover ratio and inventory turnover ratio are good

examples of activity ratios.examples of activity ratios.

AGENDAAGENDAACTIVITY RATIOSACTIVITY RATIOS

INVENTORY TURN OVER=COGS/AVG.INVENTORYINVENTORY TURN OVER=COGS/AVG.INVENTORYACCOUNT RECIEVABLE TURN OVER=NET SALES/AVG ACCOUNT RECIEVABLE TURN OVER=NET SALES/AVG RECIEVABLERECIEVABLEFIXED ASSET TURN OVER=NET SALES/AVG.FIXED ASSETSFIXED ASSET TURN OVER=NET SALES/AVG.FIXED ASSETSTOTAL ASSET TURN OVER=NET SALES/AVG.TOTAL ASSETSTOTAL ASSET TURN OVER=NET SALES/AVG.TOTAL ASSETSPAY ABLE TURN OVER=PURCHASES/AVG.ACCOUNTS PAY ABLE TURN OVER=PURCHASES/AVG.ACCOUNTS PAYABLEPAYABLEPAYMENT PERIOD IN DAYS=365/PAYABLE TURN OVERPAYMENT PERIOD IN DAYS=365/PAYABLE TURN OVEROPERATING CYCLE=INVENTORY T.O=ACC ECIEVABLE T.OOPERATING CYCLE=INVENTORY T.O=ACC ECIEVABLE T.OCASH CYCLE=OPERATING CYCLE-AVG.PAYMENT PERIODCASH CYCLE=OPERATING CYCLE-AVG.PAYMENT PERIODINVENTORY T.O IN DAYS=365/INVENTORY T.OINVENTORY T.O IN DAYS=365/INVENTORY T.ORECIEVABLE T.O IN DAYS=365/RECIEVABLE .ORECIEVABLE T.O IN DAYS=365/RECIEVABLE .O

INVANTORY TURN OVERINVANTORY TURN OVER MEANING:

A ratio showing how many times a company's inventory is sold and replaced over a A ratio showing how many times a company's inventory is sold and replaced over a period. period. 

FORMULA: INV.TURN OVER=C.O.G.S/AVG.INVENTORYINV.TURN OVER=C.O.G.S/AVG.INVENTORY CALCULATION:CALCULATION:

FOR 2007 510000/70000=7.285 FOR 2008 690000/70000=8.85  

DISCRIPTION:

COGS (cost of goods sold) may be substituted because sales are recorded at market COGS (cost of goods sold) may be substituted because sales are recorded at market value, while inventories are usually recorded at cost. Also, average inventory may be value, while inventories are usually recorded at cost. Also, average inventory may be used instead of the ending inventory level to minimize seasonal factors.used instead of the ending inventory level to minimize seasonal factors.

ANALYSIS:

A low turnover implies poor sales and, therefore, excess inventory. A high ratio A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.implies either strong sales or ineffective buying.

INVENTORY TURN OVER IN INVENTORY TURN OVER IN DAYSDAYS

MEANING:

A ratio showing how many DAYS a company's inventory is sold and A ratio showing how many DAYS a company's inventory is sold and replaced over a period.replaced over a period.

FORMULA:

365/INVENTORY TURN OVER365/INVENTORY TURN OVER CALCLATION:

FOR 2007

365/7.285=50.137

FOR 2008

365/9.85=37.05

ACCOUNT RECIEVABLE TURNOVERACCOUNT RECIEVABLE TURNOVER MEANING:MEANING:

An accounting measure used to quantify a firm's effectiveness in extending An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.ratio, measuring how efficiently a firm uses its assets.

Formula: ACC.RECIEVABLE TURNOVER=NET SALES/AVG.RECIEVABLE ACC.RECIEVABLE TURNOVER=NET SALES/AVG.RECIEVABLE

Some companies' reports will only show sales - this can affect the ratio Some companies' reports will only show sales - this can affect the ratio depending on the size of cash sales.depending on the size of cash sales.

CALCULATION:

FOR 2007 850000/110000=7.727FOR 2007 850000/110000=7.727 FOR 2008 1200000/150000=8FOR 2008 1200000/150000=8

DISCRIPTION:

By maintaining accounts receivable, firms are indirectly extending interest-By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates free loans to their clients. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts on a cash basis or that its extension of credit and collection of accounts receivable is efficient. receivable is efficient. 

ANALYSIS: A low ratio implies the company should re-assess its credit policies in order A low ratio implies the company should re-assess its credit policies in order

to ensure the timely collection of imparted credit that is not earning interest to ensure the timely collection of imparted credit that is not earning interest for the firm.for the firm.

RECIEVABLE TURN OVERRECIEVABLE TURN OVERin daysin days

MEANING:MEANING:An accounting measure used to quantify a firm's effectiveness in An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how many days a firm uses its assets.is an activity ratio, measuring how many days a firm uses its assets.

Formula: 365/ACCONTS RECIEVABLE T.O 365/ACCONTS RECIEVABLE T.O CALCULATION: FOR 2007FOR 2007 365/7.727=47.236365/7.727=47.236 FOR 2008FOR 2008 365/8=45.625 .365/8=45.625 .

FIXED ASSET TURN OVERFIXED ASSET TURN OVER

MEANING:

A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments measures a company's ability to generate net sales from fixed-asset investments -specifically property, plant and equipment (PP&E) - net of depreciation. A higher -specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.using the investment in fixed assets to generate revenues.

FORMULAFORMULA::

The fixed-asset turnover ratio is calculated as: The fixed-asset turnover ratio is calculated as: NET SALES /AVG.FIXED ASSETNET SALES /AVG.FIXED ASSET CALCULATION:

FOR 2007 850000/290000=2.931 FOR 2008 1200000/411150=2.91

ANALYSIS:

This ratio is often used as a measure in manufacturing industries, where major This ratio is often used as a measure in manufacturing industries, where major purchases are made for PP&E to help increase output. When companies make purchases are made for PP&E to help increase output. When companies make these large purchases, prudent investors watch this ratio in following years to these large purchases, prudent investors watch this ratio in following years to see how effective the investment in the fixed assets see how effective the investment in the fixed assets 

TOTAL ASSET TURN OVERTOTAL ASSET TURN OVER MEANING:MEANING:

The amount of sales generated for every dollar's worth of assets. It is The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars.calculated by dividing sales in dollars by assets in dollars.

Formula:

Also known as the Asset Turnover Ratio.Also known as the Asset Turnover Ratio.

NET SALES/AVG.TOTAL ASSETNET SALES/AVG.TOTAL ASSET CALCULATION:CALCULATION:

FOR 2007 850000/928000=0.915FOR 2007 850000/928000=0.915 FOR2008 1200000/1090000=1.10FOR2008 1200000/1090000=1.10

ANALYSIS Asset turnover measures a firm's efficiency at using its assets in generating Asset turnover measures a firm's efficiency at using its assets in generating

sales or revenue - the higher the number the better. It also indicates pricing sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.while those with high profit margins have low asset turnover.

PAYABLE TURNOVERPAYABLE TURNOVER MEANING

A short-term liquidity measure used to quantify the rate at which a A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. company pays off its suppliers. 

FORMULA:FORMULA: Accounts payable turnover ratio is calculated by taking the total purchases Accounts payable turnover ratio is calculated by taking the total purchases

made from suppliers and dividing it by the average accounts payable made from suppliers and dividing it by the average accounts payable amount during the same period.amount during the same period.

PURCHASES/AVG.ACC.PAYABLEPURCHASES/AVG.ACC.PAYABLE

CALCULATION:CALCULATION:

FOR 2007 300000/123000=2.439FOR 2007 300000/123000=2.439 FOR 2008 250000/161500=1.547FOR 2008 250000/161500=1.547

ANALYSISANALYSIS The measure shows investors how many times per period the company The measure shows investors how many times per period the company

pays its average payable amount.pays its average payable amount.

PAYMENT PERIOD IN DAYSPAYMENT PERIOD IN DAYS MEANING:MEANING:

A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers in how many days

FORMULA:FORMULA:

payment period in days is calculated by YEAR DAYS divided by PAY ABLE TURN OVER.

365/payable turn over

CALCULATION:

FOR 2007 365/2.439=149.65

FOR 2008 365/1.545=236.245

OPERATING CYCLEOPERATING CYCLE

MEANING:MEANING: Expressed as an indicator (days) of management performance efficiency, Expressed as an indicator (days) of management performance efficiency, thethe

operating cycle is a "twin" of the operating cycle is a "twin" of the cash conversion cyclecash conversion cycle. While the parts are the . While the parts are the same - receivables, same - receivables, inventoryinventory and payables - in the operating cycle, they are  and payables - in the operating cycle, they are analyzed from the perspective of how well the company is managing these analyzed from the perspective of how well the company is managing these critical operational capital assets, as opposed to their impact on cash.critical operational capital assets, as opposed to their impact on cash.

FORMULA:FORMULA:

INVENTORY TURN OVER IN DAYS+RECIEVABLE TURN OVER IN DAYSINVENTORY TURN OVER IN DAYS+RECIEVABLE TURN OVER IN DAYS

CALCULATION:CALCULATION:

FOR 2007 50.137+47.236=97.37FOR 2007 50.137+47.236=97.37 FOR 2008 37.05+45.625=82.675FOR 2008 37.05+45.625=82.675

CASH CYCLECASH CYCLE MEANING: A metric that expresses the length of time, in days, that it takes for a company to A metric that expresses the length of time, in days, that it takes for a company to

convert resource inputs into cash flows. The cash conversion cycle attempts to measure the convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties. of time the company is afforded to pay its bills without incurring penalties. 

Also known as "cash cycle".Also known as "cash cycle". CALCULATED AS:CALCULATED AS: OPERATING CYCLE – AVG.PAYMENT PERIODOPERATING CYCLE – AVG.PAYMENT PERIOD CALCULATION:CALCULATION: 2007 97.37-149.65= -52.282007 97.37-149.65= -52.28 2008 82.675-192.947= -110.2722008 82.675-192.947= -110.272 DISCRIPTION:

Usually a company acquires inventory on credit, which results in accounts payable. A Usually a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects accounts therefore, is not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and cash receivable. So the cash conversion cycle measures the time between outlay of cash and cash recovery.recovery.

ANALYSIS  

This cycle is extremely important for retailers and similar businesses. This measure This cycle is extremely important for retailers and similar businesses. This measure illustrates how quickly a company can convert its products into cash through sales. The illustrates how quickly a company can convert its products into cash through sales. The shorter the cycle, the less time capital is tied up in the business process, and thus the better shorter the cycle, the less time capital is tied up in the business process, and thus the better for the company's bottom line.for the company's bottom line.

S.NOS.NO RATIOSRATIOS 2007 2008 STATUS RESULT

1.1. INVENTORY TURN OVERINVENTORY TURN OVER 7.27.2 9.89.8 INCREASEINCREASE FAVOURABLEFAVOURABLE

2.2. INVENTORY T.0 IN DAYSINVENTORY T.0 IN DAYS 5050 3737 DECREASINGDECREASING FAVORABLEFAVORABLE

3.3. RECIVEABLE TURN OVERRECIVEABLE TURN OVER 7.77.7 88 INCREASEINCREASE FAVORABLEFAVORABLE

4.4. RECIEVABLE T.O IN DAYSRECIEVABLE T.O IN DAYS 4747 4545 DECREASINGDECREASING FAVORABLEFAVORABLE

5.5. FIXED ASSET T.OFIXED ASSET T.O 2.92.9 2.92.9 STABLESTABLE FAVOURABLEFAVOURABLE

6.6. TOTAL ASSET T.OTOTAL ASSET T.O 0.90.9 11 INCREASINGINCREASING FAVOURABLEFAVOURABLE

7.7. OPERATING CYCLEOPERATING CYCLE 8989 9090 INCREASINGINCREASING FAVOURABLEFAVOURABLE

8.8. CASH CYCLECASH CYCLE 55 4.564.56 DECREASINGDECREASING UNFAVOURABLEUNFAVOURABLE

9.9. PAYABLE TURNOVERPAYABLE TURNOVER 4.54.5 4.274.27 INCREASINGINCREASING UNFAVORABLEUNFAVORABLE

10.10. PAYABLE T.O IN DAYSPAYABLE T.O IN DAYS 80.580.5 85.4485.44 INCREASINGINCREASING UNFAVOURABLEUNFAVOURABLE