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Financial Reporting · Analysis of Financial Statements

Activity, Turnover and Market Ratios for CA Final Financial Reporting

Updated 5 October 2026 · Fact-checked

Activity ratios measure how fast a business turns inventory, debtors, creditors and assets into sales or cash. Market ratios (EPS, P/E, dividend yield) measure how investors value the shares. Pick the right numerator and average denominator, convert turnover into days, build the operating cycle, then interpret the result.

Understand Activity, Turnover and Market Ratios

Activity (turnover) ratios test efficiency. They ask: how many times in a year does a balance get used up and replaced? A higher inventory turnover means stock moves fast. A higher debtors turnover means customers pay quickly. A higher asset turnover means each rupee of assets produces more sales.

Every turnover ratio can be turned into days by dividing the days in the year (365 unless the question says 360) by the ratio. Days are easier to compare and to add up. This is how you reach the operating cycle: the time from buying stock to collecting cash from customers.

The cash conversion cycle (net operating cycle) deducts the credit period you get from suppliers. It shows how many days your own cash is tied up in operations. A shorter cycle usually means lower working capital need, but an extremely short one can signal stock-outs or aggressive supplier stretching.

Market ratios link the financial statements to the share price. EPS shows profit per equity share. P/E shows how many rupees investors pay for one rupee of earnings. Dividend yield shows cash return on the market price. Dividend payout shows the share of earnings paid out. These need the market price, so a question must give it.

The examiner rarely asks for a bare formula. You get a case with figures, compute several ratios, and then comment: is the company collecting slower, holding more stock, or being valued richly?

Key rules to remember

Inventory turnover ratio
Cost of goods sold ÷ Average inventory
Average inventory = (Opening + Closing) ÷ 2. If only closing stock is given, use it and say so. If COGS is not given, use sales only if the question directs.
Inventory holding period (days)
365 ÷ Inventory turnover = Average inventory ÷ COGS × 365
Use 360 if the question states it.
Debtors turnover ratio
Net credit sales ÷ Average trade receivables
Use total sales if credit sales are not separated. Use trade receivables including bills receivable.
Average collection period (days)
365 ÷ Debtors turnover = Average debtors ÷ Credit sales × 365
Compare with the credit terms allowed to customers.
Creditors turnover ratio
Net credit purchases ÷ Average trade payables
If purchases are not given, derive: COGS + Closing stock − Opening stock.
Average payment period (days)
365 ÷ Creditors turnover = Average creditors ÷ Credit purchases × 365
Include bills payable with trade payables.
Fixed asset turnover
Net sales ÷ Average net fixed assets
Uses net block after depreciation.
Total asset turnover
Net sales ÷ Average total assets
Working capital turnover is Net sales ÷ Net working capital in the same way.
Operating cycle
Inventory days + Debtors days
Add raw material, WIP and finished goods periods if a manufacturer's data is split.
Cash conversion cycle
Inventory days + Debtors days − Creditors days
Also called net operating cycle.
Earnings per share (EPS)
(Profit after tax − Preference dividend) ÷ Weighted average number of equity shares
Basic EPS follows Ind AS 33; diluted EPS adjusts for potential equity shares.
Price earnings ratio (P/E)
Market price per share ÷ EPS
Earnings yield is the inverse: EPS ÷ Market price.
Dividend yield
Dividend per share ÷ Market price per share × 100
Use dividend per share on the same share class.
Dividend payout ratio
Dividend per share ÷ EPS × 100
Retention ratio = 100% − Payout ratio.

How to solve Activity, Turnover and Market Ratios questions

Use this order for any ratio case. It keeps the working visible and protects your marks even if one figure goes wrong.

  1. 1Read the question for the day basis (365 or 360), and whether averages or closing balances are to be used.
  2. 2List the data you need: sales, credit sales, COGS, purchases, opening and closing balances, shares, price, dividend.
  3. 3Derive missing figures first, such as purchases or COGS, and show that working.
  4. 4Compute each turnover ratio with the correct numerator and denominator, using average balances where available.
  5. 5Convert each turnover into days and then build the operating cycle and cash conversion cycle.
  6. 6Compute market ratios: EPS, P/E, dividend yield and payout, from PAT less preference dividend and the relevant share count.
  7. 7State the formula before each answer, and round only at the end.
  8. 8Write one or two lines of interpretation: what changed, why it matters, and what management should do.

Quickest way: Days-first shortcut

When to use it: Use when the question asks for operating cycle or cash conversion cycle and gives balances and annual flows.

  1. Compute days directly: Balance ÷ Annual flow × 365 for stock (on COGS), debtors (on credit sales) and creditors (on purchases).
  2. Add stock days and debtor days for the operating cycle.
  3. Subtract creditor days for the cash conversion cycle.
  4. For market ratios, find EPS first, then P/E = Price ÷ EPS and yield = DPS ÷ Price.
  5. Check sense: collection days near credit terms, P/E and yield moving in opposite directions as price changes.

Common mistakes in Activity, Turnover and Market Ratios

  • Using total sales for inventory turnover when COGS is available.

    Sales is the figure students see first.

    Fix: Stock is carried at cost, so use COGS. Use sales only when the question gives no cost data and says so.

  • Using closing balance when opening and closing are both given.

    It is quicker and students forget the word 'average'.

    Fix: Take (Opening + Closing) ÷ 2 whenever both balances exist, unless the question says otherwise.

  • Using purchases directly from the question when only COGS and stock are given.

    Students skip the derivation.

    Fix: Purchases = COGS + Closing stock − Opening stock, ignoring other costs unless data is given.

  • Adding creditors days in the cash conversion cycle.

    Students memorise the operating cycle formula and carry the plus sign over.

    Fix: Creditors give free credit, so subtract their days from the operating cycle.

  • Forgetting to deduct preference dividend in EPS, or using year-end shares instead of weighted average.

    PAT is treated as equity earnings.

    Fix: Deduct preference dividend, then divide by the weighted average equity shares for the period.

  • Mixing up dividend yield and payout ratio.

    Both use dividend per share.

    Fix: Yield divides by market price. Payout divides by EPS.

Worked examples

Example 1

Case: Meru Foods Ltd has sales of ₹12,00,00,000 (all on credit) and COGS of ₹8,40,00,000 for the year. Purchases were ₹8,60,00,000, all on credit. Opening and closing inventory were ₹90,00,000 and ₹1,10,00,000. Opening and closing debtors were ₹1,40,00,000 and ₹1,80,00,000. Opening and closing creditors were ₹70,00,000 and ₹90,00,000. Compute the operating cycle and cash conversion cycle using 365 days and average balances.

Show the solution
  1. Average inventory = (90,00,000 + 1,10,00,000) ÷ 2 = ₹1,00,00,000.
  2. Inventory turnover = 8,40,00,000 ÷ 1,00,00,000 = 8.4 times. Inventory days = 365 ÷ 8.4 = 43.45 days.
  3. Average debtors = (1,40,00,000 + 1,80,00,000) ÷ 2 = ₹1,60,00,000.
  4. Debtors turnover = 12,00,00,000 ÷ 1,60,00,000 = 7.5 times. Collection period = 365 ÷ 7.5 = 48.67 days.
  5. Average creditors = (70,00,000 + 90,00,000) ÷ 2 = ₹80,00,000.
  6. Creditors turnover = 8,60,00,000 ÷ 80,00,000 = 10.75 times. Payment period = 365 ÷ 10.75 = 33.95 days.
  7. Operating cycle = 43.45 + 48.67 = 92.12 days.
  8. Cash conversion cycle = 92.12 − 33.95 = 58.17 days.

Answer: Operating cycle is about 92.12 days and cash conversion cycle is about 58.17 days. Debtors take longer than stock to convert, so tighter collection would shorten the cycle most.

Example 2

Case: Anvaya Ltd reports profit after tax of ₹6,00,00,000 and has 10% preference shares with a dividend of ₹40,00,000. Weighted average equity shares are 20,00,000. The equity dividend is ₹12 per share and the market price is ₹240 per share. Compute EPS, P/E ratio, dividend yield and payout ratio, and comment.

Show the solution
  1. Earnings for equity = 6,00,00,000 − 40,00,000 = ₹5,60,00,000.
  2. EPS = 5,60,00,000 ÷ 20,00,000 = ₹28 per share.
  3. P/E = 240 ÷ 28 = 8.57 times.
  4. Dividend yield = 12 ÷ 240 × 100 = 5%.
  5. Payout ratio = 12 ÷ 28 × 100 = 42.86%.
  6. Retention = 100 − 42.86 = 57.14% of earnings kept in the business.

Answer: EPS ₹28, P/E about 8.57 times, dividend yield 5%, payout about 42.86%. Investors pay about ₹8.57 for each rupee of earnings, and the company retains over half its earnings for growth.

Exam tips

  • Read the day basis and the 'average' instruction first. Many marks are lost on these two points.
  • Show formula, substitution and answer for each ratio. Step marks are given even if the final figure is off.
  • In case-scenario MCQs, identify the correct numerator and denominator before calculating. Options often reflect the common wrong choices.
  • Always add a short interpretation. Questions often ask you to comment on efficiency, liquidity or valuation.
  • If purchases or credit sales are missing, state your assumption clearly and proceed.

Practice questions from Analysis of Financial Statements

Activity, Turnover and Market Ratios in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Activity, Turnover and Market Ratios: frequently asked questions

How do I calculate the operating cycle and cash conversion cycle?

Operating cycle = inventory days + debtors days. Cash conversion cycle = operating cycle − creditors days. Compute each in days from average balances and annual flows.

Which figure do I use for the debtors turnover ratio?

Use net credit sales over average trade receivables. If the question does not separate credit sales, use total sales and state that assumption.

How do I calculate P/E ratio and dividend yield?

P/E = market price ÷ EPS. Dividend yield = dividend per share ÷ market price × 100. Find EPS first, after deducting preference dividend from PAT.

Should I use 365 or 360 days?

Follow the question. If it is silent, use 365 and mention it in your answer.