This is another form to check the liquidity position of the firm
This ratio determines how quickly certain current assets e.g. as in above inventory transfers/converts itself into cash
Turnovers are normally calculated with reference to Inventory, Debtors, Creditors etc.
Greater the conversion rate better it is
Now its clear from above that inventory rotates “X” times in a year so if we want to calculate number of days we held inventory or no of months. What we have to do is to just divide No. of days/months by the answer of the above equation.
This is another form to check the liquidity position of the firm
This ratio determines how quickly debtors are converted into cash
Greater the turnover better it is
Now its clear from above that debtor rotates “X” times in a year so if we want to calculate number of days in which we Collect debtors or no of months. What we have to do is to just divide No. of days/months by the answer of the above equation.
This is another form to check the liquidity position of the firm
This ratio determines how quickly creditors are paid
Lesser the turnover better it is
Now its clear from above that creditor rotates “X” times in a year so if we want to calculate number of days in which we pay creditors or no of months. What we have to do is to just divide No. of days/months by the answer of the above equation.
This ratio is meant to disclose the structure of the capital
Normally banks and financers use this ratio as the State Bank has bench marked the maximum debt equity ratio to 80:20 (i.e. 80% Debt+20% equity) maximum allowed debt structure
Normally external debt is considered less expensive than the equity
This ratio can be subdivided into many other ratios like Debt to Owners equity, Owners equity to total Capital etc.
Where EBIT represents earnings/profit before interest and tax
This ratio represents the earnings/profit available against each rupee of interest i.e. for payment of each rupee of interest how many rupees of profit are available
Where EAT represents earnings/profit after tax or earnings available to shareholders
This ratio represents the earnings/profit available against each rupee of preference dividend i.e. for payment of each rupee of preference dividend how many rupees of profit are available
Activity ratios are concerned with measuring the efficiency in asset management. Sometimes, these ratios are also called efficiency ratios or assets utilization ratios.
An activity ratio may, therefore, be defined as a test of relationship between sales (more appropriately with cost of sales) and the various assets of a firm.
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