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NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis

Efficiency and Turnover Ratios for NISM Research Analyst

Updated 11 October 2026 · Fact-checked

Efficiency (turnover) ratios show how well a company uses its assets and working capital to generate sales. Divide sales or cost of goods sold by an average balance, such as inventory, receivables or total assets. Convert turnover to days by dividing 365 by the ratio. The cash conversion cycle combines these days.

Understand Efficiency and Turnover Ratios

A company buys assets, stocks inventory and sells on credit. Efficiency ratios ask one question: how much sales does each rupee of these resources produce, and how fast does each resource turn into cash?

A turnover ratio counts how many times a balance is used up or renewed in a year. Higher inventory turnover means stock sells faster. Higher receivable turnover means customers pay faster. Higher asset turnover means more sales per rupee of assets.

Turnover can be flipped into days. Days = 365 ÷ turnover. So a receivable turnover of 8 means customers take about 45.6 days to pay. Days are easier to compare with credit terms.

The working capital cycle (cash conversion cycle) joins three days figures. Cash is tied up while stock sits (inventory days) and while customers owe money (receivable days). It is eased by the time the company takes to pay suppliers (payable days). A shorter cycle means less cash locked in operations.

Always compare a ratio with the company's own past and with peers in the same industry. A grocery retailer and a shipbuilder will have very different normal values. A change in trend matters more than a single number.

Key formulas to remember

Total asset turnover
Sales ÷ Average total assets
Average = (opening + closing) ÷ 2. Measures sales per rupee of assets.
Fixed asset turnover
Sales ÷ Average net fixed assets
Shows how well plant and equipment generate sales.
Inventory turnover
Cost of goods sold ÷ Average inventory
Uses COGS, not sales, because inventory is carried at cost. If a question gives only sales, use it only when told to.
Days inventory outstanding (DIO)
365 ÷ Inventory turnover
Equals Average inventory ÷ COGS × 365.
Receivable turnover
Net credit sales ÷ Average receivables
If credit sales are not given, questions usually use net sales.
Days sales outstanding (DSO)
365 ÷ Receivable turnover
Also called receivable days or average collection period.
Payable turnover
Purchases ÷ Average payables
Purchases = COGS + closing inventory − opening inventory. Some questions use COGS instead; follow the data given.
Days payable outstanding (DPO)
365 ÷ Payable turnover
Average days taken to pay suppliers.
Cash conversion cycle
DIO + DSO − DPO
Also called the net operating cycle. Operating cycle = DIO + DSO.

How to solve Efficiency and Turnover Ratios questions

Use this method for any turnover or cycle question.

  1. 1Identify which ratio is asked and write its formula.
  2. 2Pick the right numerator: sales for asset and receivable turnover, COGS for inventory turnover, purchases for payable turnover.
  3. 3Find the denominator. If opening and closing balances are given, use their average. If only one balance is given, use it.
  4. 4Calculate the turnover in times.
  5. 5If days are asked, divide 365 by the turnover. Use 365 unless the question says 360.
  6. 6For the cash conversion cycle, add inventory days and receivable days, then subtract payable days.
  7. 7Interpret: a shorter cycle or higher turnover is usually better, but check the industry and trend.
  8. 8Check the units and that the answer is in times or days as asked.

Quickest way: Match the numerator, then divide into 365

When to use it: Use when a numerical MCQ gives balances and asks for a turnover, days or cycle figure.

  1. Pair each ratio with its numerator: asset and receivables with sales, inventory with COGS, payables with purchases.
  2. Compute days directly: balance ÷ flow × 365.
  3. Combine as DIO + DSO − DPO.
  4. Scan options for the one matching your answer; wrong options often come from using sales instead of COGS or from forgetting the average.

Common mistakes in Efficiency and Turnover Ratios

  • Using sales instead of COGS for inventory turnover.

    Sales is the most familiar number in the question.

    Fix: Inventory is valued at cost, so match it with COGS unless the question explicitly says otherwise.

  • Using the closing balance when the opening balance is also given.

    It saves a step under time pressure.

    Fix: When both balances are given, always average them.

  • Subtracting receivable days or adding payable days in the cash conversion cycle.

    Students memorise the three terms but not the signs.

    Fix: Cash is locked by stock and customers, so add DIO and DSO. Supplier credit funds the company, so subtract DPO.

  • Treating a higher days figure as better.

    Higher turnover is good, so students assume higher numbers are always good.

    Fix: Days are the reverse of turnover. Higher inventory or receivable days usually signal slower movement.

  • Comparing ratios across unrelated industries.

    A single benchmark seems simpler.

    Fix: Compare only with the company's own history and with similar businesses.

  • Reading a long payable period as always good.

    It lowers the cash conversion cycle.

    Fix: It helps cash, but a very long period may signal liquidity stress or strained supplier relations.

Worked examples

Example 1

A company has sales of ₹600 crore, COGS of ₹360 crore, opening inventory of ₹50 crore and closing inventory of ₹70 crore. Calculate inventory turnover and days inventory outstanding.

Show the solution
  1. Average inventory = (50 + 70) ÷ 2 = ₹60 crore.
  2. Inventory turnover = COGS ÷ Average inventory = 360 ÷ 60 = 6 times.
  3. DIO = 365 ÷ 6 = 60.83 days.

Answer: Inventory turnover is 6 times and DIO is about 60.8 days.

Example 2

A company has DIO of 60 days, receivable turnover of 8 times and payable turnover of 10 times. Find the cash conversion cycle (use 365 days).

Show the solution
  1. DSO = 365 ÷ 8 = 45.625 days.
  2. DPO = 365 ÷ 10 = 36.5 days.
  3. Cash conversion cycle = DIO + DSO − DPO = 60 + 45.625 − 36.5 = 69.125 days.

Answer: The cash conversion cycle is about 69.1 days.

Exam tips

  • Read which base the question wants: sales, COGS or purchases. This decides the answer.
  • Check whether the question asks for times or days before you pick an option.
  • Remember the sign pattern DIO + DSO − DPO; it is a frequent MCQ.
  • Expect conceptual questions on what a rising receivable days or falling asset turnover suggests.
  • Use 365 days unless the question states 360.

Practice questions from Company Analysis - Financial Analysis

Efficiency and Turnover Ratios in other exams

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

Efficiency and Turnover Ratios: frequently asked questions

What is the formula for receivable days?

Receivable days equal 365 ÷ receivable turnover, where receivable turnover is net credit sales ÷ average receivables. It shows how long customers take to pay on average.

What is the cash conversion cycle?

It is the time cash stays locked in operations. It equals inventory days plus receivable days minus payable days. A shorter cycle generally means more efficient working capital use.

How do you calculate asset turnover ratio?

Divide sales by average total assets. The result shows how many rupees of sales each rupee of assets generates in a year.

Can the cash conversion cycle be negative?

Yes. If payable days exceed the sum of inventory and receivable days, suppliers fund the operations. Some businesses with fast sales and long supplier credit show this pattern.