CFA Level 1: Turnover Ratios

Turnover Ratios

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Question

Which of the following is/are true about turnover ratios?

I. A high receivables turnover ratio might imply overly lax credit policy.

II. A low inventory ratio implies that capital might be locked up for a long time in excess inventory.

III. A high payables turnover ratio implies that the firm is lagging behind in its credit payments.

Answers

Explanations

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A. B. C. D.

Explanation

The receivables turnover is the ratio of net sales to average receivables. If this ratio is high, then it indicates that the receivables are relatively low compared to sales. This could happen if the credit policy is stringent, forcing fewer sales on credit. The inventory turnover is the ratio of net sales to average inventory. A low value for this ratio indicates that the firm is maintaining a high level of inventory to maintain the sales. This might be an indicator (though not necessarily) that capital is being locked up in excess inventory. The payables turnover ratio is the ratio of the cost of goods sold to average trade payables. A high ratio implies that the payables are not very high compared to the COGS. This will happen when the firm is paying off its payables debt at a quick pace.

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