Operations Ratios Calculator

Inventory Turnover measures how many times inventory is sold and replaced during a period. It's calculated as Cost of Goods Sold / Average Inventory. A higher ratio indicates efficient inventory management - goods are selling quickly and not sitting on shelves. The optimal ratio varies by industry; retailers typically have higher turnover than manufacturers.

The Cash Conversion Cycle measures the time between paying for inventory and collecting cash from customers. CCC = Days Inventory Outstanding + Days Sales Outstanding - Days Payables Outstanding. A shorter or negative CCC is better - it means less working capital is tied up in operations. A negative CCC means you collect from customers before paying suppliers.

Asset Turnover measures how efficiently a company uses its assets to generate revenue. It's calculated as Net Sales / Average Total Assets. A higher ratio indicates more efficient use of assets. Asset-light businesses (like software companies) typically have higher asset turnover than capital-intensive businesses (like manufacturing).

Days Sales Outstanding (DSO) measures the average number of days to collect payment after a sale. It's calculated as (Accounts Receivable / Credit Sales) x Period Days, or 365 / Receivables Turnover. Lower DSO means faster collection and better cash flow. Most businesses target DSO of 30-45 days.

Days Inventory Outstanding (DIO) measures how long inventory sits before being sold. It's calculated as 365 / Inventory Turnover. Lower DIO is generally better - it means less capital tied up in inventory. However, extremely low DIO might indicate stockout risks. The optimal DIO depends on your industry and supply chain.

The Operating Cycle measures the time from purchasing inventory to collecting cash from sales. Operating Cycle = DIO + DSO. It shows how long working capital is tied up in operations before converting back to cash. A shorter operating cycle indicates more efficient operations and lower working capital requirements.

DuPont Analysis breaks down Return on Equity (ROE) into three components: Profit Margin x Asset Turnover x Equity Multiplier. Asset Turnover from operations ratios is the middle component, showing how efficiently assets generate sales. This helps identify whether ROE is driven by profitability, efficiency, or leverage.

A good Receivables Turnover depends on your industry and credit terms. Generally, higher is better as it means faster collection. If you offer 30-day terms, a turnover of 12 (collecting every 30 days) is expected. Higher than expected indicates efficient collection; lower may indicate collection problems or overly generous credit terms.

To improve (shorten) your CCC: 1) Reduce DIO by better inventory management and forecasting, 2) Reduce DSO by tightening credit terms, offering early payment discounts, and improving collection processes, 3) Increase DPO by negotiating longer payment terms with suppliers. Be careful not to strain customer or supplier relationships.

Working Capital Turnover measures how efficiently working capital (Current Assets - Current Liabilities) is used to generate sales. It's calculated as Net Sales / Working Capital. Higher turnover indicates efficient use of working capital. Very high turnover might indicate insufficient working capital for growth.