The company invests its working capital in current business and production operations.
Turnover ratios(indicators) are of great importance for assessing, analyzing and forecasting the financial condition of the company or enterprise, since the rate at which current assets are converted into cash has a significant impact on profitability, creditworthiness and solvency.
The turnover ratio characterizes:
- number of revolutions, which working capital makes during the analyzed period of time (for example, a quarter or a year);
- revenue, per one monetary unit, for example, one ruble of working capital.
Formula for calculating the working capital turnover ratio
The turnover ratio can be determined by dividing the revenue received over a period of time by the average amount of working capital for the same period.
The formula that determines the turnover ratio is the ratio of sales revenue for a quarter or year to the average amount of working capital:
Cob = RP/CO, where
- To ob.- turnover ratio;
- RP- sales revenue for the analyzed period (for example, quarter or year);
- CO- the average amount of working capital for the same period (calculated as the arithmetic mean: the amount of working capital at the beginning and end of the same period, divided by two).
What are the sources of information for the calculation?
The source of information for calculating the turnover ratio is:
- annual accounting balance;
- income statement(formerly profit and loss).
The balance of the line with code 1200 shows the total amount of current assets.
In the income statement, line code 2110 reflects sales proceeds, excluding value added tax and excise taxes.
Cob = line 2110 Form 2 / (line 1200 beginning year Form 1 + line 1200 ending year Form 1) / 2
Example.
The billing period is one year.
The proceeds from the sale are 900 million rubles.
The average annual amount of working capital is 300 million rubles.
Let's calculate the turnover ratio:
This means that per ruble of working capital, goods worth 3 rubles were sold. The annual amount of working capital (300 million rubles) made 3 turnovers.
What factors does the coefficient depend on?
The value of the turnover ratio is influenced by various economic, political and production factors. 
External factors:
- industry in which the company operates or organization;
- enterprise size(small, medium, large);
- scope and type of activity enterprises;
- economic situation in the country;
- inflationary processes;
- expensive loans;
- promotion taxes.
Internal factors directly depend on the operation of the enterprise itself, for example:
- management system efficiency assets;
- accounting policies;
- price policy;
- volume of sales and the rate of its change;
- assessment methods stocks;
- system improvement calculations;
- qualification personnel.
The turnover ratio mainly depends on the industry in which the organization or enterprise operates. Trade enterprises have the highest coefficients. Business in the field of science or culture does not have such a high indicator.
How to determine the profitability of working capital of fixed assets?
The profitability of the enterprise's turnover shows how effectively the organization's working capital is used - the amount of profit per 1 ruble of current assets.
Formula for calculating the profitability of working capital
K p = PE/SO, Where 
- Emergency— net profit for the analyzed period (for example, quarter or year);
- CO— average amount of working capital.
Balance sheet profitability formula:
K p =line 2400 / line 1200.
If the profitability ratio increases, then the company receives enough profit to make efficient use of current assets.
Analysis of the turnover ratio of current assets
Turnover ratio analysis- the main component of financial analysis.
Carried out using:
- comparison of actual indicators(proceeds from sales, amounts of current assets) with planned ones;
- comparison of actual indicators with relevant historical data.
As a result of the comparison, either the acceleration of turnover (the coefficient will increase) or the slowdown (the coefficient will decrease) is determined.
Ratio increase:
- leads to release material resources;
- volume increase products;
- helps increase business activity and profits;
- allows you to allocate funds for development and modernization, without attracting additional loans for this;
- indicates improved methods of using and organizing inventory at the enterprise.
An increase in the turnover ratio indicates that current assets are used efficiently and effectively. In general, the financial condition and solvency of the enterprise improves.
Increasing the turnover ratio is achieved by:
- increase in sales growth compared to growth working capital;
- technology modernization production;
- improving the marketing system, sales and supply;
- increasing competitiveness;
- quality improvement products;
- reduction in production cycle;
- payment compliance disciplines.
A decrease in the turnover ratio leads to a deterioration in the financial condition of the organization or enterprise, there is a need to raise additional funds.
Reasons for reducing the working capital turnover ratio
The economic crisis and its components have a negative impact on the turnover ratio, for example:
- decline in volumes production;
- decline in consumer demand;
- violation of contractual and payment agreements obligations.
Also, a decrease in the turnover ratio can be caused by the following reasons:
- accumulation and excess of working capital(most often stocks);
- low qualifications personnel;
- growth of accounts payable enterprises;
- ineffective marketing policy;
- errors in the logistics system.
Timely detection and elimination of the causes of a decrease in the turnover ratio will help to avoid a financial crisis and bankruptcy of the enterprise.
Is there a normal turnover ratio?
There is no norm or so-called standard turnover ratio.
Therefore, the main task for economists– observe in a timely manner what will happen to the dynamics of changes in the indicator over certain periods of time. For comparison, you can use data from other organizations and enterprises that operate in a similar industry.
If the turnover ratio increases over time This means that the financial well-being and solvency of the enterprise is growing.
If the turnover ratio decreases every year, it is recommended to immediately review the economic policy of doing business.
The total capital turnover ratio is one of the indicators of the business activity of an enterprise. Reflects the turnover rate of all company funds. That is. how many times in the analyzed period does the full cycle occur (from the production of goods (services) to sales and receipt of profit.
This is an indicator of the efficiency of use of the company's assets. Since it shows how much money each unit of assets brings from sales.
Turnover analysis to determine business activity
Business activity reflects the performance of a company relative to the amount of invested funds or the amount of their consumption in the production process. The indicator is expressed in the dynamism of the enterprise’s development, the fulfillment of its assigned tasks, and the speed of turnover of funds.
Depends on turnover:
- annual turnover value;
- the amount of expenses (the higher the turnover rate, the less expenses there are for each turnover);
- speed of circulation at each stage (acceleration at one stage entails an increase in the speed of turnover at other stages).
The higher the turnover, the less the enterprise needs to attract additional funds or the more products it can produce. As a result of accelerating the turnover of assets, working capital is released, and less materials, raw materials, and fuels and lubricants are required. Accordingly, the financial resources that the organization invested in these reserves are released.
Analysis of business activity involves the study of various coefficients. One of the main ones is the indicator of total capital (assets) turnover.
Total capital turnover ratio (resource productivity): formula
As a rule, a year is taken as the analyzed period. The ratio shows how many times the company’s assets “turn over”. The turnover rate - the speed at which funds are converted into money supply - directly affects the solvency of the organization.
Formula for the total capital turnover ratio:
revenue / average assets.
Total capital turnover ratio - balance sheet formula:
page 2110 / (0.5 * (page 1600np + page 1600kp)),
where line 2110 is from Form 2 (financial performance report), line 1600 is from Form 1 (balance sheet).
Let's calculate the efficiency of capital use using Excel. Data:
Indicator norm
Let's analyze the total capital turnover ratio. A standard value for the indicator has not been established. Most often, the obtained figures are compared with the corresponding values in the industry. For example, in capital-intensive areas, turnover will be lower than in trade.
The higher the ratio, the faster the capital “turns around”, the more money the company earns from each ruble of asset. For the analyst, the dynamics of the indicator over a number of periods are important.
The acceleration of capital turnover reflects:
- increasing production and technical potential;
- increase in profit (per each unit of asset);
- high efficiency of asset use.
The growth of the indicator may be artificial due to the use of leased fixed assets.
A decrease in the ratio indicates a decrease in sales volume or an increase in financial investments in the assets used.
Let's go back to the example and display it on a graph:
A stable increase in the capital turnover ratio indicates the efficiency of using the company's assets. The release of funds (due to accelerated turnover) allows the organization to improve its material and technical base, possibly launch a new product, or open a new sales direction.
The financial activity of commercial organizations is based on the analysis of a number of indicators, which include asset turnover, the calculation of which allows us to determine how effectively the organization uses its assets or liabilities.
Asset turnover
COds = V / DS, where
KODS – cash turnover ratio,
B – revenue,
DS - the amount in the accounts and cash register of the enterprise.
If the ratio tends to decrease, this means that the operation of the enterprise is organized inefficiently, and highly liquid assets are used at a slower pace.
Turnover of tangible current assets (inventories)
The correct organization of the production process also requires the effective use of reserves, the calculation of which is carried out in the following order:
KOzap = B / ZAP, where
KOzap – inventory turnover ratio,
B – revenue,
ZAP – book value of inventories.
An increase in the indicator indicates that the demand for products sold is at a good level and the goods are not sitting in warehouses. A decrease in the indicator indicates that the company’s marketing policy is poorly organized and requires careful analysis.
The analysis of these indicators should be carried out not by comparison with established standards, but by considering their dynamics over the past years and making a comparison with the activities of competitors. So, if the indicator does not reach the norm, but at the same time, compared to other reporting periods, it is of greater importance, this indicates the correct organization of the enterprise’s activities and a gradual increase in asset turnover.
Analysis of profitability of organizations
The financial and economic activities of any legal entity, regardless of the form of ownership, are assessed by analyzing the absolute and relative indicators of its activities. The indicators of the first group do not carry an economic burden and are purely arithmetic in nature.
Relative indicators characterize how well the financial and economic activities of an enterprise are organized and show the dynamics of its development. One such indicator is return on assets, which is calculated by multiplying the asset turnover ratio by the return on products sold.
It is the ratio of net profit to revenue, and net profit in turn is the difference between revenue received and cost of goods sold.
Thus, the higher the capital productivity ratio, the greater the organization’s profit in the reporting period.
We analyze the results obtained
Ra = PE / SAsr, where
Ra – return on assets,
PE – net profit,
CAср – average asset value.
The return on current assets is calculated in the same way.
In order to make a complete analysis of the enterprise’s activities, all groups of factors must be taken into account: capital productivity, return on sales, intensity of OS operation, efficiency of financial management. Constant monitoring of the enterprise’s activities will allow us to develop the right development strategy aimed at ensuring financial stability. The completeness of the analysis of business activity also depends on the correctness of the data provided in the reporting documentation.
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The effective functioning of any enterprise is impossible without the competent and rational use of working capital. Depending on the type of activity, stage of the life cycle, or even the time of year, the amount of working capital an organization has may vary. However, it is the availability and proper use of these resources that determines how successful and long-lasting the activities of any business entity will be.
In order to assess the correct use of a company's working capital, there are many coefficients that analyze the speed of circulation, sufficiency, liquidity and many other equally significant characteristics. One of the most important indicators necessary to determine the financial condition of an organization is the working capital turnover ratio.
Turnover ratio (K rev), or turnover rate, shows how many times during the period of time under study the enterprise is able to completely turn over its own working capital. Thus, this value characterizes the efficiency of the company. The larger the value obtained, the more successfully the company uses its available resources.
Formula and calculation
The turnover ratio shows the number of revolutions made by working capital over the period of time under consideration. It is calculated as: 
Where:
- Q p is the volume of products sold at the organization’s wholesale prices excluding VAT;
- F ob.av. – the average balance of working capital found during the period under study.
If we recall the approximate form of the cash circulation cycle at an enterprise, it turns out that the money that an organization invests in the work of its company returns to it after some time in the form of finished products. The company sells these products to its customers and again receives a certain amount of money. Their value is the income of the organization.
Thus, the general scheme “money-product-money” implies the cyclical nature of the company’s activities. The turnover ratio in this case shows how many similar turnovers the organization’s funds can make in a certain period of time (most often in 1 year). Naturally, for the effective and fruitful operation of an enterprise it is necessary that this value was as large as possible.
Necessary indicators for calculation
The working capital turnover ratio can be determined using the data presented in the financial statements of the organization. The quantities needed to determine it are shown in the first and second forms of financial statements.
So, in the general case, the volume of products sold is calculated as the revenue received by the organization in one cycle (since in most cases an annual coefficient is used for analysis, in the future we will take into account the time period t=1). Revenue for the specified period is taken from the income statement (formerly the income statement), where it is shown in a separate line as the amount received by the enterprise from the sale of work, goods or services.
The average balance of working capital is found from the second section of the balance sheet and is calculated as: 
Where F 1 and F 0 are the amounts of the company’s working capital for the current and past periods of time. Note that if the calculations use data for 2013 and 2014, then the resulting coefficient will represent the rate of funds turnover specifically for 2013.
In addition to the turnover ratio in economic analysis, there are other values that analyze the turnover rate of an organization’s working capital. Many of them are also closely related to this indicator.
Thus, one of the values accompanying the turnover ratio is duration of one revolution (T rev). Its value is calculated as the quotient of dividing the number of days corresponding to the analyzed period (1 month = 30 days, 1 quarter = 90 days, 1 year = 360 days) by the value of the turnover ratio itself:
Based on this formula, the duration of one revolution can also be calculated as: 
Another important indicator used when analyzing the financial condition of an organization is utilization rate of funds in circulation K load. This indicator determines the amount of working capital required to receive 1 ruble of revenue from product sales. In other words, the coefficient shows how many percent of the organization’s working capital falls on one unit of the final result. Thus, in another way the load factor can be called the capital intensity of working capital.
It is calculated using the following formula: 
As can be seen from the methodology for calculating this indicator, its value is the inverse of the value of the turnover ratio. And this means that the lower the load indicator, the higher the efficiency of the organization.
Another generalizing factor in the efficiency of using working capital is the value profitability (R ob.av.). This ratio is characterized by the amount of profit received for each ruble of working capital and shows the financial efficiency of the organization. The formula for calculating it is similar to the values used to find the turnover ratio. However, in this case, instead of revenue from sales of products, the enterprise’s profit before tax is used in the numerator: 
Where π is profit before tax.
Also, as in the case of the turnover ratio, the higher the return on capital value, the more financially stable the enterprise’s activities. 
Turnover ratio analysis
Before moving on to analyzing the turnover ratio itself and looking for ways to increase the efficiency of an organization, let’s define what is generally meant by the concept of “working capital of a company.”
Working capital of an enterprise is understood as the amount of assets that have a useful life of less than one year. Such assets may include:
- stocks;
- unfinished production;
- finished products;
- cash;
- short-term financial investments;
- accounts receivable.
In most cases, the turnover ratio in a company has approximately the same value over a long period of time. This value may depend on the types of core activities of the company (for example, for trade enterprises this indicator will be the highest, while in the field of heavy industry its value will be quite low), its cyclical nature (some companies are characterized by a surge in activity in certain seasons) and many other factors.
However, in general, in order to change the value of this ratio and increase the efficiency of using the company’s assets, it is necessary to competently approach the working capital management policy.
Thus, a reduction in inventories can be achieved through a more economical and rational use of resources, reducing the material intensity of production and the amount of losses. In addition, significant improvements can be achieved through more efficient supply management.
The amount of work in progress is reduced by rationalizing the production cycle and reducing the cost of inventory. And reducing the amount of finished products in stock can be achieved with the help of more advanced logistics and aggressive marketing policies of the organization.
Note that a positive impact on even one of the values presented above already has a significant impact on the turnover ratio. In addition, it is possible to achieve an increase in the efficiency of using working capital at an enterprise in indirect ways. Thus, the value of the indicator will be higher with an increase in the organization’s profit and sales volumes.
If, when plotting the dynamics of the turnover ratio over a long period of time, one can note a stable decrease in its value, this fact may be a sign of a deterioration in the financial condition of the company.
Why might it be declining?
There are several reasons for reducing the turnover ratio. Moreover, its value can be influenced by both external and internal factors. For example, if the general economic situation in the country worsens, the demand for luxury goods may fall, the appearance of new models of electrical equipment on the market will reduce the demand for old ones, and so on.
There may also be several internal reasons for a decrease in turnover rate. Among them it is worth highlighting:
- errors in working capital management;
- logistics and marketing errors;
- growth of the company's debt;
- use of outdated production technologies;
- change in the scale of activity.
Thus, most of the reasons for the deterioration of the situation at the enterprise associated with management errors and low qualifications of workers.
At the same time, in some cases, the value of the turnover ratio may decrease due to the transition to a new level of production, modernization and the use of new technologies. In this case, the value of the indicator will not be associated with the low efficiency of the company. 
Let's consider a certain organization "Alpha". Having analyzed the company’s activities for 2013, we learned that revenue from sales of products at this enterprise amounted to 100 thousand rubles.
At the same time, the amount of working capital was equal to 35 thousand rubles in 2013 and 45 thousand rubles in 2012. Using the data obtained, we calculate the asset turnover ratio: 
Since the resulting coefficient is 2.5, we can note that in 2013 the Alpha company had the duration of one turnover cycle: 
Thus, one production cycle of the Alpha enterprise takes 144 days.
When determining this coefficient, an indicator is obtained that characterizes the number of inventory turns over a certain time interval. This coefficient indicates how many times over a certain period of time this or that type of inventory makes a complete circuit, i.e., it reflects inventory turnover.
Calculation of inventory turnover ratio
There are two options for calculating this indicator:
- at cost of sales;
- by sales revenue.
In the first option, when determining inventory turnover, the numerator reflects the cost of sales, and the average value of inventory for the analyzed period is substituted into the denominator of the formula.
To ob. inventory = Cost of sales / Average cost of enterprise inventory
With another option for calculating this coefficient, the numerator does not reflect the cost of sales, but revenue and the coefficient is calculated as follows:
To ob. inventories = Revenue / Average cost of enterprise inventories
In turn, the average value of an enterprise’s inventories is determined by the arithmetic average, i.e., by the formula:
Average inventory value = (inventory value at the beginning of the period + inventory value at the end of the period) / 2.
Calculation of inventory turnover ratio based on financial statements
From the financial results report, the numerator of the formula is filled with the indicator of line 2120 “Cost of sales”. From the balance sheet to calculate the average value of inventories, information is reflected on line 1210 “Inventories”.
The calculation of the average value of inventories according to the balance sheet is as follows:
Average value of inventories = (line 1210 “Inventories” at the beginning of the period + line 1210 “Inventories” at the end of the period) / 2.
According to financial statements, the formula for calculating the inventory turnover ratio is as follows:
To ob. inventory = line 2120 “Cost of sales” / Average line 1210 “Inventory”
If the “revenue” indicator is taken as the numerator for calculating this coefficient, then the formula looks like this:
To ob. inventory = line 2110 “Revenue” / Average line 1210 “Inventories”
The duration of one inventory turnover in days means
In addition to the number of turnovers of inventories, their turnover is measured by the circulation time or turnover duration and is expressed in days of turnover. To determine the duration of one inventory turnover in days, the turnover ratio (in revolutions) and the number of days in the period are used. The number of days in a period is taken to be 360 or 365.
The number of days (duration) during which inventories complete one turnover is calculated using the formula:
Duration of 1 inventory turnover = (Accepted annual number of days * Average enterprise inventory value) / Cost of sales
Duration of 1 inventory turnover = (Accepted annual number of days * Average value of enterprise inventories) / Revenue
If the inventory turnover ratio is already known, then the duration of 1 inventory turnover is found as follows:
Duration of 1 inventory turnover = Accepted annual number of days / K volume. reserves
A decrease or increase in turnover ratios shows
An increase in turnover time indicates a decrease in inventory turnover.
An increase in the rate of inventory turnover (i.e., the turnover ratio) means an increase in demand for goods, finished products of the enterprise, a decrease - overstocking or a decrease in demand.
Example of calculating inventory turnover ratio
The initial data for calculating the coefficient and duration of turnover are presented in Table 1.
Table 1
The average value of inventory is determined and the data is entered into the table:
2014 = (50406 + 50406) / 2 = 50406 thousand rubles.
2015 = (50406 + 57486) / 2 = 53946 thousand rubles.
2016 = (57486 + 72595) / 2 = 65040.5 thousand rubles.
Based on the table data, this coefficient is calculated:
To ob. reserves 2014: 306428 / 50406 = 6.07 revolutions;
To ob. reserves 2015: 345323 / 57486 = 6.40 revolutions;
To ob. reserves 2016: 293016 / 65040.5 = 4.50 revolutions.
Based on the calculated inventory turnover ratio, the duration of inventory turnover is calculated:
2014: 360 / 6.07 = 59.30 days;
2015: 360 / 6.40 = 56.25 days;
2016: 360 / 4.50 = 80 days.
In 2015, compared to 2014, we can talk about an increase in the business activity of the enterprise, since the duration of one inventory turnover decreased by 3.05 days (from 59.30 days to 56.25 days), and the inventory turnover increased by 0.33 times (from 6.07 revolutions to 6.40 revolutions). The data in Table 2 indicate a slowdown in inventory turnover and a decrease in business activity of the enterprise in 2016 compared to 2015: inventory turnover decreased by 1.9 turns (from 6.40 turns to 4.50 turns), and the duration of inventory turnover increased by 23.75 days (from 56.25 days to 80 days), which is a negative trend and indicates a decrease in demand for finished products or goods that are included in the company’s inventories.
Turnover ratios and inventory turnover times calculated from cost of sales and revenue will differ significantly from each other due to the excess of revenue over cost of sales.
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