![]() ![]() Thus, the fixed asset turnover formula is: The fixed asset turnover ratio is sales divided by average fixed assets. There are many ways to achieve a high turnover ratio, including selling only a small number of stock keeping units, using a just-in-time production system, and rapidly selling off unused raw materials and finished goods at discounted prices. Thus, the inventory turnover formula is:Īnnual cost of goods sold ÷ Inventory = Inventory turnover The inventory turnover ratio is the cost of goods sold divided by average inventory. Net annual credit sales ÷ ((beginning receivables + ending receivables) / 2) = Receivable turnoverĪ high ratio indicates that the company is selective about only selling to the highest-quality customers, sets conservative payment terms, and collects overdue invoices aggressively. Thus, the receivable turnover formula is: ![]() The receivables turnover ratio is credit sales divided by average accounts receivable. The best-managed corporations show an ongoing, gradual improvement in these ratios, as management finds more ways to enhance the capabilities of the business. It is best to plot the activity ratios for a business on a trend line, to see if there are long-term changes in how well assets are being managed. The most common activity ratios are noted below. A well-managed organization minimizes its use of receivables, inventory, and fixed assets while still generating the largest-possible amount of revenue. Activity ratios measure how well an organization uses its assets to generate revenue. ![]()
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