Turnover Ratios

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Turnover RatioDescriptionWhen to UseExampleFormula
Inventory Turnover RatioMeasures how efficiently a company manages and sells its inventory.Assess inventory management efficiency.An inventory turnover ratio of 5 indicates inventory is sold and replaced 5 times a year.Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory
Accounts Receivable Turnover RatioMeasures how quickly a company collects payments from customers.Assess accounts receivable management efficiency.An accounts receivable turnover ratio of 8 means accounts receivable turn over 8 times annually.Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Accounts Payable Turnover RatioMeasures how quickly a company pays its suppliers.Evaluate accounts payable management efficiency.An accounts payable turnover ratio of 6 suggests payments to suppliers occur 6 times per year.Accounts Payable Turnover Ratio = Purchases / Average Accounts Payable
Asset Turnover RatioMeasures how efficiently a company uses its assets to generate revenue.Evaluate asset utilization and efficiency.An asset turnover ratio of 0.8 suggests assets generate 80% of revenue annually.Asset Turnover Ratio = Revenue / Total Assets
Total Asset Turnover RatioEfficiencyMeasures how efficiently a company uses its assets to generate revenue.Evaluate asset utilization and efficiency.A total asset turnover ratio of 0.8 suggests assets generate 80% of revenue annually.
Receivables Turnover RatioMeasures the efficiency of accounts receivable management in generating sales.Assess accounts receivable turnover.A receivables turnover ratio of 6 means receivables are collected and replaced 6 times annually.Receivables Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Inventory Turnover DaysRepresents the average number of days it takes to sell inventory.Assess the speed of inventory turnover.Inventory turnover days of 45 suggests it takes 45 days to sell and replace inventory.Inventory Turnover Days = 365 days / Inventory Turnover Ratio
Receivables Turnover DaysRepresents the average number of days it takes to collect accounts receivable.Assess the efficiency of accounts receivable collection.Receivables turnover days of 60 indicates it takes 60 days on average to collect receivables.Receivables Turnover Days = 365 days / Receivables Turnover Ratio
Payables Turnover DaysRepresents the average number of days it takes to pay suppliers.Assess the efficiency of accounts payable management.Payables turnover days of 30 suggests it takes 30 days on average to pay suppliers.Payables Turnover Days = 365 days / Accounts Payable Turnover Ratio
Fixed Asset Turnover RatioMeasures how efficiently a company uses its fixed assets to generate revenue.Evaluate the utilization of fixed assets.A fixed asset turnover ratio of 2 suggests fixed assets generate twice their value in revenue.Fixed Asset Turnover Ratio = Revenue / Net Fixed Assets
Working Capital Turnover RatioMeasures the efficiency of working capital in generating sales.Assess working capital utilization.A working capital turnover ratio of 4 suggests working capital generates 4 times its value in sales.Working Capital Turnover Ratio = Net Sales / Working Capital
Cash Turnover RatioMeasures the efficiency of cash usage in generating sales.Assess cash management efficiency.A cash turnover ratio of 3 suggests cash generates 3 times its value in sales.Cash Turnover Ratio = Net Sales / Average Cash and Cash Equivalents
Accounts Payable Turnover DaysRepresents the average number of days it takes to pay accounts payable.Assess the efficiency of accounts payable management.Accounts payable turnover days of 60 indicates an average payment cycle of 60 days.Accounts Payable Turnover Days = 365 days / Accounts Payable Turnover Ratio
Gross Asset Turnover RatioMeasures how efficiently a company uses its total assets to generate revenue before depreciation.Evaluate asset utilization and efficiency.A gross asset turnover ratio of 0.9 suggests assets generate 90% of revenue before depreciation.Gross Asset Turnover Ratio = (Revenue – Depreciation) / Total Assets
Sales to Inventory RatioCompares annual sales to average inventory, indicating how many times inventory is sold in a year.Assess inventory turnover efficiency.A sales to inventory ratio of 6 suggests inventory is sold 6 times a year.Sales to Inventory Ratio = Net Sales / Average Inventory
Sales to Receivables RatioCompares annual sales to average accounts receivable, showing how many times receivables turn over.Evaluate accounts receivable turnover.A sales to receivables ratio of 8 means accounts receivable turn over 8 times annually.Sales to Receivables Ratio = Net Sales / Average Accounts Receivable
Sales to Working Capital RatioMeasures how efficiently a company uses its working capital to generate sales.Assess the utilization of working capital.A sales to working capital ratio of 5 suggests working capital generates 5 times its value in sales.Sales to Working Capital Ratio = Net Sales / Working Capital
Sales to Total Assets RatioMeasures the proportion of sales revenue relative to total assets.Evaluate the efficiency of asset utilization.A sales to total assets ratio of 0.7 suggests 70% of assets are generating sales revenue.Sales to Total Assets Ratio = Net Sales / Total Assets
Operating Income to Total Assets RatioMeasures how efficiently a company generates operating income relative to total assets.Assess asset utilization in generating operating income.An operating income to total assets ratio of 0.1 means 10% of assets generate operating income.Operating Income to Total Assets Ratio = Operating Income / Total Assets
Operating Income to Sales RatioMeasures the proportion of operating income relative to sales revenue.Assess the efficiency of operating income generation.An operating income to sales ratio of 0.15 indicates 15% of revenue is operating income.Operating Income to Sales Ratio = Operating Income / Net Sales
The Enlightened Accountant by Gennaro Cuofano – FourWeekMBADownload

Connected Financial Concepts

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The circle of competence describes a person’s natural competence in an area that matches their skills and abilities. Beyond this imaginary circle are skills and abilities that a person is naturally less competent at. The concept was popularised by Warren Buffett, who argued that investors should only invest in companies they know and understand. However, the circle of competence applies to any topic and indeed any individual.

What is a Moat

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Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.

Buffet Indicator

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The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.

Venture Capital

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Venture capital is a form of investing skewed toward high-risk bets, that are likely to fail. Therefore venture capitalists look for higher returns. Indeed, venture capital is based on the power law, or the law for which a small number of bets will pay off big time for the larger numbers of low-return or investments that will go to zero. That is the whole premise of venture capital.

Foreign Direct Investment

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Foreign direct investment occurs when an individual or business purchases an interest of 10% or more in a company that operates in a different country. According to the International Monetary Fund (IMF), this percentage implies that the investor can influence or participate in the management of an enterprise. When the interest is less than 10%, on the other hand, the IMF simply defines it as a security that is part of a stock portfolio. Foreign direct investment (FDI), therefore, involves the purchase of an interest in a company by an entity that is located in another country. 

Micro-Investing

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Micro-investing is the process of investing small amounts of money regularly. The process of micro-investing involves small and sometimes irregular investments where the individual can set up recurring payments or invest a lump sum as cash becomes available.

Meme Investing

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Meme stocks are securities that go viral online and attract the attention of the younger generation of retail investors. Meme investing, therefore, is a bottom-up, community-driven approach to investing that positions itself as the antonym to Wall Street investing. Also, meme investing often looks at attractive opportunities with lower liquidity that might be easier to overtake, thus enabling wide speculation, as “meme investors” often look for disproportionate short-term returns.

Retail Investing

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Retail investing is the act of non-professional investors buying and selling securities for their own purposes. Retail investing has become popular with the rise of zero commissions digital platforms enabling anyone with small portfolio to trade.

Accredited Investor

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Accredited investors are individuals or entities deemed sophisticated enough to purchase securities that are not bound by the laws that protect normal investors. These may encompass venture capital, angel investments, private equity funds, hedge funds, real estate investment funds, and specialty investment funds such as those related to cryptocurrency. Accredited investors, therefore, are individuals or entities permitted to invest in securities that are complex, opaque, loosely regulated, or otherwise unregistered with a financial authority.

Startup Valuation

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Startup valuation describes a suite of methods used to value companies with little or no revenue. Therefore, startup valuation is the process of determining what a startup is worth. This value clarifies the company’s capacity to meet customer and investor expectations, achieve stated milestones, and use the new capital to grow.

Profit vs. Cash Flow

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Double-Entry

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Balance Sheet

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Income Statement

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The income statement, together with the balance sheet and the cash flow statement is among the key financial statements to understand how companies perform at fundamental level. The income statement shows the revenues and costs for a period and whether the company runs at profit or loss (also called P&L statement).

Cash Flow Statement

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The cash flow statement is the third main financial statement, together with income statement and the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming from operations, investing and financing. The cash flow statement can be prepared with two separate methods: direct or indirect.

Capital Structure

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The capital structure shows how an organization financed its operations. Following the balance sheet structure, usually, assets of an organization can be built either by using equity or liability. Equity usually comprises endowment from shareholders and profit reserves. Where instead, liabilities can comprise either current (short-term debt) or non-current (long-term obligations).

Capital Expenditure

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Capital expenditure or capital expense represents the money spent toward things that can be classified as fixed asset, with a longer term value. As such they will be recorded under non-current assets, on the balance sheet, and they will be amortized over the years. The reduced value on the balance sheet is expensed through the profit and loss.

Financial Statements

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Financial statements help companies assess several aspects of the business, from profitability (income statement) to how assets are sourced (balance sheet), and cash inflows and outflows (cash flow statement). Financial statements are also mandatory to companies for tax purposes. They are also used by managers to assess the performance of the business.

Financial Modeling

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Financial modeling involves the analysis of accounting, finance, and business data to predict future financial performance. Financial modeling is often used in valuation, which consists of estimating the value in dollar terms of a company based on several parameters. Some of the most common financial models comprise discounted cash flows, the M&A model, and the CCA model.

Business Valuation

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Business valuations involve a formal analysis of the key operational aspects of a business. A business valuation is an analysis used to determine the economic value of a business or company unit. It’s important to note that valuations are one part science and one part art. Analysts use professional judgment to consider the financial performance of a business with respect to local, national, or global economic conditions. They will also consider the total value of assets and liabilities, in addition to patented or proprietary technology.

Financial Ratio

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WACC

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The Weighted Average Cost of Capital can also be defined as the cost of capital. That’s a rate – net of the weight of the equity and debt the company holds – that assesses how much it cost to that firm to get capital in the form of equity, debt or both. 

Financial Option

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A financial option is a contract, defined as a derivative drawing its value on a set of underlying variables (perhaps the volatility of the stock underlying the option). It comprises two parties (option writer and option buyer). This contract offers the right of the option holder to purchase the underlying asset at an agreed price.

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