Methodology for analyzing the turnover and profitability of an organization's working capital. Profitability as an indicator of company performance
Return on working capital is an indicator of the effectiveness of working capital management. It indicates how much profit is made for each ruble working capital. The indicator needs to be analyzed over time, comparing it with the industry average.
Profitability is a relative indicator of economic efficiency, which indicates the profitability from the use of certain resources. It is calculated in relation to equity, borrowed capital, fixed assets, sales, assets, production, margin, etc.
Return on working capital (R OK) is the efficiency of using the organization's working capital. Find it in the form of a coefficient or percentage.
In simple words: R OK - the amount of profit for each ruble current assets.
What is considered working capital?
Working capital is funds that belong to the enterprise and are its property. This is an indicator of financial solvency and economic sustainability, the difference between current assets and current liabilities.
Working capital includes:
- accounts receivable;
- Construction in progress;
- stocks of raw materials and supplies;
- finished products stored in warehouses.
The amount of capital depends on the cost of raw materials, supplies, the cost and timing of loan repayment, additional costs for selling products, the duration of the production cycle and other factors.
Information about working capital is located in the second asset section of the enterprise's balance sheet.
Why calculate profitability?
Financial position of any company is closely related to the condition and efficiency of use of working capital. By managing them competently, the company gains independence from external sources of financing and increases its liquidity. It is necessary to analyze the profitability of working capital in order to timely identify and eliminate problems in managing inventory, accounts receivable, and products in warehouses.
Calculation formula
To calculate P OK the formula is used:
- Pch - net profit;
- C OA - the cost of asset turnover.
The indicator is calculated for a certain period of time - year, quarter, month. The value of assets is taken as the average value over the required time.
Average cost assets are found using the formula:
- OA NP - the value of current assets at the beginning of the period;
- OA KP - the value of current assets at the end of the period.
Formula for calculation based on balance sheet data:
- p. 2400 - value of line 2400 from form 2;
- page 1200 - value of line 1200 from form 1.
Calculation of the indicator using an example
For clarity, it is better to use tables and the balance sheet of the enterprise.
The value of the enterprise's current assets at the beginning of 2016 amounted to 567,495 thousand rubles, at the end of the year - 678,905 thousand rubles.
Let's calculate R OK:
In percentages:
Thus, the company’s return on working capital in 2016 was 7% (each ruble of working capital brought 7 kopecks of profit).
To evaluate the indicator over time, you need to compare it with data for other years of the company’s operation (download the table in Excel).
The graph of changes in the indicator is shown in the diagram below.
Thus, the company's profitability is gradually increasing. This means that every ruble of working capital provides more profit (in 2013 - only 5 kopecks, in 2016 - 6 kopecks).
Standards
R OK speaks about the provision of an enterprise with working capital: it shows how much this asset item provides the company’s profit. There is no specific standard for this indicator that would be suitable for all companies in any industry. You need to analyze profitability over past periods.
Important! Profitability in different areas differs significantly. So, for example, at large industrial city-forming enterprises with high turnover it will be lower than in small companies offering services.
The resulting profitability indicator can be compared with the industry average. If the company is lagging behind, then this is a sure sign of ineffective management, and the enterprise development strategy needs to be adjusted. The most revealing comparison will be with its closest competitors.
The main difficulty in calculating the indicator is to separate working capital from assets. In addition, the indicators of return on equity and borrowed funds are of great value for analysis - they provide a detailed picture of the use of resources in the enterprise. Therefore, calculating P OK without dividing by methods of obtaining assets is not always rational. It is found to create an overall picture of the working capital supply.
Net working capital is an indicator that demonstrates the presence of liquid assets in a company and is used to analyze the financial viability of a company. From an economist's point of view, net working capital and own working capital – similar concepts and, being a characteristic of capital, often mean the same thing (at least, the Anglo-American financial institution draws an analogy between these two terms). Let's find out how to find net working capital and talk about the features of this indicator and its importance in the life of the company.
Net working capital on balance sheet
This capital represents part of the current assets, financed from its own or equivalent borrowed resources. It is not without reason that financiers call this capital a safety net, since its presence often saves an enterprise when the need arises to urgently repay short-term obligations and continue work, even in a reduced volume.
It is impossible to see the actual value of this indicator in the balance sheet, since the amount of net working capital is calculated, and several balance sheet values serve as the basis for it.
When calculating the amount of net capital, it is necessary to remember that short-term liabilities (CL) (for example, bank loans) are not taken into account in their composition, since part of the net capital is most often used to repay them. This difference will be the size of net assets that determine the level of financial solvency of the company, and the formula will be as follows:
Net working capital = Current assets (OA) – Short-term liabilities (KP)
Net working capital: formula for balance sheet lines
It is not difficult to find out the amount of net capital from the compiled balance sheet - only two lines of the balance sheet are involved in the calculations:
- Line 1200 – the total amount of the 2nd section, often equal to the cost equity;
- Line 1500 is the result of the 5th section “Short-term liabilities”.
Having the values of these lines in hand, calculate net working capital using the formula:
CHK o = OA (p. 1200) - KP (p. 1500)
Net working capital analysis
The calculated value of the indicator is assessed based on absolute and relative values, calculating its total value, structure, profitability and turnover.
A positive value, i.e. the excess of working capital over liabilities, indicates the solvency of the company, since its own funds enough to carry out the work process without attracting borrowed capital. However, the amount of net working capital should not be too high. A value that has not decreased over several reporting periods indicates:
- about inefficient use of funds: the company does not invest them in the development of production and does not invest in profitable enterprises;
- on the long-term use of long-term borrowed resources in financing working capital.
Negative net working capital indicates a lack of equity, which could lead to bankruptcy in the future, and the need to attract external financing.
Net capital structure
Net capital is analyzed in terms of the structure based on the liquidity of the assets that make it up. There are several degrees of liquidity:
- high – balance lines 1240 and 1250;
- middle – line 1230;
- low – line 1210.
When calculating the level of net working capital, pay attention to the liquidity of assets: the more highly liquid assets there are on the balance sheet, the more successful it is considered and copes with paying obligations.
Return on net working capital
To determine a company's profitability, profitability is calculated. It shows the profitability of each ruble invested in production and is calculated as a percentage using the formula:
R chk = (P h / ChK o) x 100%, where
P h - net profit.
Turnover
Net capital turnover is characterized by the calculation of several indicators:
- turnover ratio, showing the number of capital turnover for the period under review according to the formula K = Vyr / CHK o;
- capital load factor, which determines the amount of working capital invested in obtaining 1 rub. sales revenue, according to the formula K = CHK o / Vyr.
Optimization of net working capital
Effective use of net capital – important aspect management of it. Enterprises apply various measures:
- reduce the share of assets with low liquidity, reducing production's need for inventories;
- reducing the cost of raw materials by revising logistics schemes, minimizing transportation and storage costs;
- reducing the volume of work in progress;
- reducing the share of receivables and payables, etc.
4. Calculation of return on working capital
8) R ob.cap. = Approx. Accounting / OA avg. = page 140 (F. No. 2) / average on page 290 (F. No. 1);
From 2004 to 2007, the profitability of working capital continued to decline steadily (15% to 2%), which is a negative trend and indicates a decrease in the overall efficiency of its functioning, a decrease in the return on the use of working capital, as well as the irrational use of working capital, a decline in production ( a decrease in the total cost is proportional to the drop in sales revenue).
To increase the profitability of working capital, an enterprise needs to use working capital more efficiently, change the amount of turnover and its structure, and use progressive methods of selling products.
3.3. Factor analysis of working capital turnover indicators
Indicators of turnover of working capital can be considered as an effective indicator with the identification of factors of the first and subsequent orders. The duration of the turnover of working capital depends on the average size of working capital and sales revenue. That's why, overall change the turnover rate will consist of two components: the average annual size of current assets (OA avg.) is a first-order factor, and sales revenue (Vr.r.) is a second-order factor.
The change in the duration of turnover of working capital due to a change in the average size of current assets is calculated as follows:
ΔB(OA avg.) = T * ΔOA avg. / Vyr.r.0;
ΔB(OA avg.) = 360 * (10677.5 - 10403.5) / 115436 = 0.85;
In general, from 2004 to 2005, the change in current assets negatively, although not too significantly, affected the turnover of current assets and the period of their turnover, which was mainly caused by an increase in the total mass of current assets and, in particular, an irrational business strategy in terms of the purchase of materials and sales finished products. To increase turnover, an enterprise needs to keep current assets in a more liquid form and prevent growth and large differences accounts receivable and finished products in the warehouse, that is, to revise the marketing policy for the sale of products, if this is possible in principle.
The influence of a second-order factor (revenue from product sales) on the change in the performance indicator is expressed:
ΔB(Vyr.r.) = T * OA avg.1 * [ (1 / Vyr.r.1) – (1 / Vyr.r.0) ];
ΔВ(Vyr.r.) = 360 * 10677.5 * [ (1 / 95142) – (1 / 115436)] = 7.1;
The size of average working capital had little effect on the turnover of current assets. Their turnover slowed down due to a decrease in sales revenue, which affected it 8 times more than the value of average working capital, which indicates a decrease in production and sales volumes, as well as irrational and ineffective use of working capital (the more turnover the working capital makes in a year assets, the greater the revenue will be).
Since each of the factor indicators can be presented as a result of additive model indicators, that is, the sum of factor indicators expressing the action of second-order factors. To detail the analysis, the method of equity participation is used. The share of influence of each component of working capital on the turnover time of working capital is calculated.
Deviation balance:
ΔB(OA av.) = ΔBOA(Zap. av.) + ΔBOA(DZ. av.) + ΔBOA(KFV. av.) + ΔBOA(DS. av.) + ΔBOA(VAT. av.) + VOA(Other OA. Wed.);
ΔBOA(Zap. av.) = ΔB(OA av.) * ΔZap. Wed / ΔOA avg.;
ΔBOA(Zap. av.) = 0.85 * (6986.5 - 5704) / 274 = 3.98;
Accounts receivable:
ΔBOA(DZ. av.) = ΔB(OA av.) * ΔDZ. Wed / ΔOA avg.;
ΔBOA(DZ. av.) = 0.85 * (2749 - 3906.5) / 274 = - 3.59;
Money:
ΔBOA(DS. avg.) = ΔB(OA avg.) * ΔDS. Wed / ΔOA avg.;
ΔBOA(DS. avg.) = 0.85 * (179.5 - 185.5) / 274 = - 0.018;
ΔВОА(VAT. av.) = ΔВ(ОА av.) * ΔVAT. Wed / ΔOA avg.;
ΔBOA(VAT. av.) = 0.85 * (755 - 599.5) / 274 = 0.48;
The balance of deviations converges:
ΔB(OA av.) = ΔBOA(Zap. av.) + ΔBOA(DZ. av.) + ΔBOA(KFV. av.) + ΔBOA(DS. av.) + ΔBOA(VAT. av.) = 3.98 + ( - 3.59) + (- 0.018) + 0.48 = 0.85;
The increase in inventories had a negative impact on turnover, which was almost completely compensated by a decrease in accounts receivable (3.98 and -3.59, respectively). This suggests that the enterprise uses resources irrationally (from year to year, increasing inventories). The concentration of working capital in the least liquid form slows down turnover, which causes production volume to fall and sales profits to decrease. The reduction in average accounts receivable had a positive impact on turnover and almost completely repaid Negative influence increase in material reserves. It is impossible to unambiguously assess the change in accounts receivable in one direction or another. Its decrease indicates an increase in the liquidity of working capital, the return of funds to circulation and the repayment of debts. But it can also mean a drop in product sales (if there were no sales of products not on credit) and, accordingly, vice versa.
Change Money had a positive, albeit insignificant (-0.018) effect on turnover due to their small specific gravity in current assets.
ΔB(Vyr.r.) = ΔВVyr.r.(PZ) + ΔВVyr.r.(KR) + ΔВVyr.r.(UR) + ΔВVyr.r.(RP);
Due to cost ( variable costs):
ΔVyr.r.(PZ) = ΔV(Vir.r.) * ΔPZ / ΔVir.r.;
ΔVVal.r.(PZ) = 7.1 * (90121 - 112732) / -20294 = 7.91
Due to business expenses:
ΔВVyr.r.(KR) = ΔВ(Vyr.r.) * ΔKR / ΔVyr.r.;
ΔVVal.r.(KR) = 7.1 * (-12) / -20294 = 0.004;
Due to management expenses:
ΔВVyr.r.(UR) = ΔВ(Vyr.r.) * ΔUR / ΔVyr.r.;
ΔVvyr.r.(UR) = 7.1 * (3645) / -20294 = - 1.27;
Due to sales results:
ΔВVyr.r.(RP) = ΔВ(Vyr.r.) * ΔРП / ΔVyr.r.;
ΔVVal.r.(RP) = 7.1 * (1376 - 2692) / -20294 = 0.46;
The balance of deviations converges:
ΔВ(Vyr.r.) = ΔВVyr.r.(PZ) + ΔВVir.r.(KR) + ΔВVir.r.(UR) + ΔВVyr.r.(RP) = 7.91 + 0.004 + (- 1.27) + 0.46 = 7.1;
A slowdown in turnover (an increase in the period of one turnover) is associated with a reduction in sales revenue. The greatest impact (7.91) was exerted by a decrease in the total cost of manufactured products, that is, a reduction in its production. Selling, administrative expenses and sales results had an insignificant impact on turnover (0.004, -1.27 and 0.46, respectively). As a result of the calculation, it turned out that an increase in management expenses has a positive effect on the change in the period of turnover of working capital, i.e. reduces it. The reduction in commercial expenses and sales results negatively affected the change in the turnover period, which indicates a reduction in production and sales of products.
Conclusion
The condition and efficiency of use of working capital is one of the main conditions for the successful operation of an enterprise. Limited resources, instability market economy, inflation, non-payments, and other crisis phenomena force enterprises to change their policies in relation to current assets, look for new sources of replenishment, study the problem of the efficiency of their use, their optimal sizes.
The first chapter of this thesis covers the theoretical and organizational aspects of working capital turnover. The concept of working capital, its composition and classification, purpose and role in production are given. Factors that increase the efficiency of use and turnover of working capital are identified. The main goal, objectives and information sources of working capital analysis are determined.
Main points of the first chapter:
1) Working capital constantly circulates in the process economic activity, changing its form from monetary to commodity and vice versa. Thus, they form the bulk of production costs. On the other hand, they are a guarantor of the enterprise’s liquidity, that is, its ability to pay its obligations.
2)Basic components working capital are: inventories (materials and finished products), accounts receivable, short-term financial investments and cash.
3) The financial position of enterprises is directly dependent on the state of working capital, the efficiency and rationality of their use and involves the comparison of costs with the results of economic activity.
4) By managing working capital, the company is able to depend less on external sources of funds and increase its liquidity.
5) The main goal of working capital analysis is the timely identification and elimination of shortcomings in working capital management and finding reserves for increasing the intensity and efficiency of its use.
6) The main information sources for the analysis of current assets are the balance sheet (form No. 1) and the profit and loss statement (form No. 2), approved by order of the Ministry of Finance of the Russian Federation dated July 22, 2003 No. 67n.
The second chapter reflects methodological basis and approaches to analyzing working capital turnover. Methods for analyzing the level of dynamics and structure of working capital, methods for analyzing the turnover and profitability of an organization's working capital, and methods for factor analysis of working capital turnover indicators are described. Formulas for calculating turnover ratios, calculating the influence of first, second and third order factors, their significance for the analysis of current assets, as well as the main interpretations of the ratio and changes in indicators are given.
The third chapter directly analyzes the working capital of Remservice LLC. It includes: horizontal and vertical analysis, analysis of turnover indicators, factor analysis of working capital turnover indicators.
The analysis concluded the following:
From 2004 to 2007, there was an increase in the share of inventories in the total volume of working capital (from 39.77% to 77.92%) and a decrease in the share of short-term receivables (from 59.97% to 6.77%). Which is associated with a decrease in the enterprise’s business activity and production and sales volumes. The amount of material reserves increased approximately 4 times, and their share almost 2.5 times. This suggests that current assets are becoming increasingly illiquid and this entails a slowdown in their turnover. A simultaneous increase in the share of inventories and a decrease in the share of accounts receivable indicates a drop in the production of finished products and a deterioration in their sales. The company is recommended to reduce material inventories to the optimal level and revise the marketing policy for product sales.
In general, during the analyzed period, the turnover of current assets decreased by almost 2 times (from 11 to 6 full turns), which was mainly caused by a decline in production and a decrease in sales revenue, an increase in the total mass of current assets and, in particular, an irrational business strategy in terms of purchasing materials and sales of finished products. A decrease in turnover indicates a decrease in the efficiency of resource use and overall profitability of production, as well as an increase in the instability of the financial condition of the enterprise. Moreover, turnover decreased both due to an increase in current assets, in particular inventories, and due to a decrease in revenue. From 2004 to 2007, additional attraction of current assets increased from 2114.26 to 3497.28 tr, which indicates a deterioration in the rationality of the enterprise’s economic activities and a decrease in production profitability. To increase turnover, the company needs to increase the liquidity of current assets (by reducing the share of materials and increasing cash) and to prevent growth and large differences in accounts receivable and finished products in the warehouse, that is, to revise the marketing policy for product sales.
From 2004 to 2007, the profitability of working capital continued to decline steadily (from 15% to 2%), which is a negative trend and indicates a decrease in the overall efficiency of its functioning, a decrease in the return on the use of working capital, as well as irrational use of working capital, a decline in production (the decrease in the total cost is proportional to the decrease in sales revenue).
The size of working capital had a slight impact on the turnover of current assets (0.85), turnover slowed down due to a decrease in sales revenue (7.1), which affected it 8 times more than the value of average working capital, which indicates a decrease in production volume and sales, as well as irrational and ineffective use of working capital (the more turnover current assets make in a year, the greater the revenue will be). The greatest impact (7.91) was exerted by a decrease in the total cost of manufactured products, that is, a reduction in its production. The increase in inventories had a negative impact on turnover, which was almost completely compensated by a decrease in accounts receivable (3.98 and -3.59, respectively). This suggests that the enterprise uses resources irrationally (from year to year, increasing inventories). The concentration of working capital in the least liquid form slows down turnover, which causes production volume to fall and sales profits to decrease. The reduction in average accounts receivable had a positive effect on turnover and almost completely offset the negative impact of the increase in inventories.
To increase the turnover of working capital, the enterprise needs to use working capital more efficiently and change the amount of turnover and its structure, use progressive methods of selling products, etc. The enterprise is recommended to reduce inventories of materials to the optimal level, increase the liquidity of current assets (by reducing the share of materials and increasing cash) and prevent growth and large differences in accounts receivable and finished products in the warehouse, that is, revise the marketing policy for product sales.
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Conclusion The task of effective management of current assets for enterprises is most relevant in the modern economy, since the condition and efficiency of use of current assets is one of the main conditions for the successful operation of an enterprise, which predetermines financial condition and the stability of its position in the market. The development of market relations determines new conditions...
Conclusion The conducted research convinced us of the multidimensional nature of the topic. course work. In the process of writing the course work, it was revealed that the organization of management of the formation and use of working capital of an enterprise, taking into account methods adequate to a market economy, is carried out within the framework of financial management. In a market economy, the management of a company must have a clear...
Income characterizes the size of the effect obtained as a result of the commercial activities of the enterprise. 9; 257 Chapter II: A system of indicators characterizing the financial condition of an enterprise in the hospitality industry Financial activity is the working language of business, and it is almost impossible to analyze the operations or results of an enterprise other than through financial...
The main purpose of analyzing the capital of an enterprise is to identify trends in the dynamics of the volume and composition of capital in the pre-planned
period and their impact on financial stability and efficiency
use of capital.
The economic efficiency of all company activities consists of the efficiency of using the resources available to the business entity: fixed and working capital, equity capital and investment capital (see Fig. 1).
Rice. 1. Main indicators of economic efficiency
company capital structure
Profitability indicators are relative characteristics financial results and efficiency of the enterprise. They measure the profitability of an enterprise from various positions and are grouped in accordance with the interests of participants in the economic process and market exchange.
Based on the indicator net profit The profitability of all types of capital of the company is determined using the method of financial ratios - the ratio of one accounting indicator to another (see table 1).
Table 1
Main indicators of return on capital and methods for calculating them
|
Explanations |
A comment |
1. Return on total capital of the enterprise (Rok) |
Rock= (P / Bsr) *100% |
Bsr - average balance sheet total for the period P - net profit |
Shows the efficiency of using all the assets of the enterprise. The decrease in the coefficient is a consequence of falling demand for products |
2. Return on fixed capital (Rv) |
Рв = (P / АВср) *100% |
АВср - average value non-current assets for the period |
Shows the efficiency of using fixed assets. An increase in the ratio with a decrease in the return on total capital ratio indicates an increase in mobile funds |
3. Return on working capital |
Rv = (P / AOsr) * 100% |
AOsr - average value of current assets for the period |
Shows the efficiency of using working capital. An increase in the ratio indicates an acceleration of capital turnover |
4. Return on equity (Rsk) |
Rsk = (P/Ks) *100% |
Kc - the average value of sources of own funds on the balance sheet for |
Characterizes the annual return on funds invested in the enterprise. An increase in the indicator shows an increase in financial attractiveness for investors. |
5. Return on investment (borrowed) capital (Ri) |
Ri = (P / Ki) *100% |
Ki - the average amount of loans and borrowings for the period (short-term and long-term liabilities) |
Shows the efficiency of using investment capital invested in the activities of the enterprise |
Return on equity is the most significant indicator in the activities of an enterprise, characterizing the efficiency of using the property owned by it. Based on this indicator, the owner of the assets can choose where to invest them. When calculating, it is not operating income that is taken into account, but the final, net profit, which will be distributed among the owners (shareholders) of the enterprise.
A change in the values of the return on equity ratio can be caused, for example, by a rise or fall in the quotations of the company's shares on the stock exchange, however, it should be borne in mind that the accounting price of the shares does not always correspond to their market price. Therefore, a high return on equity ratio does not necessarily indicate a high return on the capital invested in the enterprise.
These indicators are studied in dynamics, and the trend of their changes is used to judge the effectiveness of the enterprise’s business activities.
Analysis of the efficiency of using equity and borrowed capital of companies is a way of accumulating, transforming and using information accounting and reporting aimed at:
Assess the current and future financial condition of the organization, i.e. use of own and borrowed capital;
Justify possible and acceptable rates of development of the organization from the point of view of providing them with sources of financing;
Reveal available sources funds, evaluate rational ways of mobilizing them;
Predict the position of the enterprise in the capital market.
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- Business plan development
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How to diagnose the financial condition of an enterprise?
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... Profitability ratios
The first three indicators assess the profitability of turnover when selling products. To obtain percentage values, you must multiply the coefficient value by 100%.
Gross Profit Margin (GPM) - Another name for this ratio is Gross margin ratio. Demonstrates the share of gross profit in the company's sales volume.
Calculated using the formula: GP/NS = Gross Profit/Total Revenue.
Operating profit margin (OPM)
- demonstrates the share of operating profit in sales volume.
Calculated using the formula: OP/NS = Operating profit/Total revenue.
Net Profit Margin (NPM)
- demonstrates the share of net profit in sales volume.
Calculated using the formula: NI/NS = Net Income/Total Revenue.
The following 4 ratios evaluate the return on capital invested in the enterprise. The calculation is made for an annual period using the average value of the corresponding items of assets and liabilities. For calculations for a period of less than one year, the profit value is multiplied by the appropriate coefficient (12, 4, 2), and the average value of current assets for the period is used. To obtain percentage values, as in previous cases, it is necessary to multiply the coefficient value by 100%.
Return on Current Assets (RCA)
- demonstrates the enterprise’s capabilities in ensuring a sufficient amount of profit in relation to the company’s working capital used. The higher the value of this ratio, the more efficiently working capital is used.
Calculated using the formula: NI/CA = Net profit/Current assets.
Return on non-current assets (RFA)- d demonstrates the ability of the enterprise to provide a sufficient amount of profit in relation to the company's fixed assets. The higher the value of this ratio, the more efficiently fixed assets are used.
Calculated using the formula: NI/FA = Net profit/Fixed assets.
Return on Assets (Return on Investment) (ROI) - There has been some terminological confusion regarding this indicator. Literally translated from English, the name of this indicator sounds like “return on investment,” although, as follows from the formula, there is no talk of any investment.
Calculated using the formula: NI/EA = Net Income/Total Assets.
Return on equity (ROE)
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n allows you to determine the efficiency of use of capital invested by the owners of the enterprise. This indicator is usually compared with possible alternative investments in other securities. It shows how much monetary units each unit invested by the owners of the company “earned” net profit.
Calculated using the formula: NI/EQ = Net Income/Total Equity.
... Business Activity Ratios
These ratios allow you to analyze how effectively the company uses its funds.
Inventory turnover ratio (ST) - reflects the speed of inventory sales. To calculate the coefficient in days, you need to divide 365 days by the value of the coefficient. In general, the higher the inventory turnover ratio, the less funds tied up in this least liquid group of assets. It is especially important to increase turnover and reduce inventories if there is significant debt in the company’s liabilities.
Calculated using the formula:
CGS/I = Cost products sold/Inventory cost.
The calculation is made only for the annual period, using the sum of direct production costs for the current year and the average value of the amount of inventories for the current year. In the case of calculations for a period of less than a year, the value of direct production costs must be multiplied by a coefficient, respectively: for one month - 12, for a quarter - 4, for half a year - 2. In this case, the average value of the amount of inventory for the calculation period is used.
Accounts receivable turnover ratio (ACP) - n represents the average number of days required to collect the debt. To obtain the required value (number of days), it is necessary to multiply the value of the coefficient by 365. The lower this number, the faster the receivables turn into cash, and consequently, the liquidity of the company’s working capital increases. High value coefficient may indicate difficulties in collecting funds from accounts receivable.
Calculated using the formula:
AR/NS = Average accounts receivable for the year / Total revenue for the year.
The calculation is made only for the annual period, using the total revenue for the year and the average value of accounts receivable for the current year. In the case of calculations for a period of less than one year, the value of revenue from the sale of products (services) must be multiplied by a coefficient, respectively: for one month - 12, quarter - 4, half a year - 2. In this case, the average value of accounts receivable for the billing period is used .
Accounts payable turnover ratio (CP) - This figure represents the average number of days it takes a company to pay its bills. To obtain the required value (number of days), it is necessary to multiply the value of the coefficient by 365. The lower this value, the more internal funds are used to finance the company's working capital needs. And vice versa than more days, the more accounts payable is used to finance the business. It's best when these two extremes are combined. Ideally, it is advisable for a company to collect debts from debtors before paying debts to creditors. A high CP value may indicate insufficient quantities cash to meet current needs due to decreased sales, increased costs, or increased working capital needs.
Calculated using the formula:
AP/P = Average accounts payable for the year/Total purchases for the year.
The calculation is made only for the annual period, and the total amount for which purchases were made is used (direct production costs: costs of raw materials, materials and components, with the exception of piecework wages) for the current year and the average value of accounts payable for the same period. In case of calculation for a period of less than a year, the value of the purchase amount must be multiplied by a coefficient, respectively: for one month - 12, quarter - 4, half a year - 2. In this case, the average value of accounts payable for the billing period is used.
Working Capital Turnover Ratio (NCT) - shows how effectively the company uses investments in working capital and how this affects sales growth. To obtain the required number of days, it is necessary to multiply the value of the coefficient by 365. The higher the value of this coefficient, the more effectively the company uses net working capital.
Calculated using the formula:
NS/NWC = Total revenue for the year/Average net working capital.
The calculation is made only for the annual period, using the total revenue from sales of products or services for the current year and the average value of net working capital for the current year. In the case of calculations for a period of less than a year, the amount of revenue must also be multiplied by the appropriate coefficient, and the value of net working capital must be the average for the calculation period.
Fixed Asset Turnover Ratio (FAT) - this coefficient is similar to the concept of capital productivity. It characterizes the efficiency of the enterprise's use of the fixed assets at its disposal. The higher the ratio, the more efficiently the company uses fixed assets. Low level capital productivity indicates insufficient sales volume or unreasonably high level capital investments. However, the values of this coefficient differ greatly from each other in various industries. Also, the value of this coefficient greatly depends on the methods of calculating depreciation and the practice of assessing the value of assets. Thus, a situation may arise that the fixed asset turnover rate will be higher in an enterprise that has worn-out fixed assets.
Calculated using the formula:
NS/FA = Total revenue for the year/Average value of non-current assets.
The calculation is made only for the annual period, using the total revenue from sales of products (services) for the current year and the average value of the amount of non-current assets for the current year. In the case of calculating the coefficient for the periods: month, quarter, half-year - the average value of the amount of non-current assets for the calculation period is used in the calculation, and the value of the revenue received for the reporting period must be multiplied by 12, 4 and 2, respectively.
Asset turnover ratio (TAT) - characterizes the efficiency of the company’s use of all resources at its disposal, regardless of the sources of their attraction. This coefficient shows how many times per year the full cycle production and circulation, bringing a corresponding effect in the form of profit. This ratio also varies greatly depending on the industry.
Calculated using the formula:
NS/TA = Total revenue for the year/Average of total assets for the year.
The calculation is made only for a period of one year, using the total revenue from sales of products (services) for the current year and the average value of the sum of all assets for the current year. In the case of calculating the coefficient for the periods: month, quarter, half-year, the average value of the sum of all assets for the billing period is included in the calculation, and the value of the revenue received for the reporting period must be multiplied by 12, 4 and 2, respectively.