Ration analysis

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

04 February 2011 Hi
Respected Member,

Please help me in following :-

1. Debtors turnover ratio
2. Creditors turnover retio

3 Fixed assets turnover ratio
4. total assets turnover ratio

I want to know what will be the effect if there is higher ratio and in case of lower ratio respectively of above from the point of view of bank for project finance.

Thanks in advance

RAMESH KUMAR VERMA

RAMESH KUMAR VERMA (Expert)
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05 February 2011 Debtors’ turnover ratio:-

Accounts receivable turnover ratio or debtors turnover ratio indicates the number of times the debtors are turned over a year. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. It is the reliable measure of the time of cash flow from credit sales. There is no rule of thumb which may be used as a norm to interpret the ratio as it may be different from firm to firm.
The effect of a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors (or receivables). Trade debtors are expected to be converted into cash within a short period of time and are included in current assets. Hence, the liquidity position of concern to pay its short term obligations in time depends upon the quality of its trade debtors.
[Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors]

Creditors turnover ratio:-
The average payment period ratio represents the number of days by the firm to pay its creditors. A high creditors turnover ratio or a lower credit period ratio signifies that the creditors are being paid promptly. This situation enhances the credit worthiness of the company. However a very favorable ratio to this effect also shows that the business is not taking the full advantage of credit facilities allowed by the creditors.
It signifies the credit period enjoyed by the firm in paying creditors. Accounts payable include both sundry creditors and bills payable. Same as debtors turnover ratio, creditors turnover ratio can be calculated in two forms, creditors turnover ratio and average payment period.
[Creditors Turnover Ratio = Credit Purchase / Average Trade Creditors]

Fixed assets:-

The fixed asset turnover ratio is the ratio of net sales to net fixed assets (also known as property, plant, and equipment). A high ratio indicates that a company is doing an effective job of generating sales with a relatively small amount of fixed assets. Conversely, if the ratio is declining over time, the company has either overinvested in fixed assets or it needs to issue new products to revive its sales. Another possible effect is for a company to make a large investment in fixed assets, with a time delay of several months to a year before the new assets start generating revenues.

Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-utilization of fixed assets. The ratio is calculated by using following formula:
Fixed Assets Turnover Ratio = Cost of Sales / Net Fixed Assets

The total asset turnover represents the amount of revenue generated by a company as a result of its assets on hand. This equation is a basic formula for measuring how efficiently a company is operating.

Total Asset Turnover ratio indicates the effectiveness of the firm’s use of its total asset base and it is calculated as follows:
Total Asset Turnover = Net Sales / Average Total Net Assets

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