The profitability of the business increases, when all resources and equipments acquired by the business entity are used efficiently. In this context efficiency or activity ratios are developed. Examples of efficiency ratios are as follows :
- Stock turnover
- Working capital turnover
- Debtors turnover
- Creditors turnover.
Explanation of Stock turnover :
- Cost of goods sold (COGs) = Sales – Gross profit
= Sales + gross loss (If it is given)
- COGS = Opening stock of goods + purchase of raw material + purchase expense + wages + factory expenses – closing stock of raw material
- This ratio is the measurement of efficiency for the conversion of stock into sales.
- For this ratio, it is established that higher the ratio – higher the sales – higher the profit.
