In accounting, turnover ratios are the financial ratios in which an annual income statement amount is divided by the average balance of an asset (or group of assets) throughout the year. Turnover ratios include:
- accounts receivable turnover ratio
- inventory turnover ratio
- total assets turnover ratio
- fixed assets turnover ratio
- working capital turnover ratio
The larger the turnover ratio, the better. For instance, a large amount of credit sales in relationship to a small amount of accounts receivable indicates that the company was efficient and effective in collecting its accounts receivable. (Remember that ratios are averages. Hence, some of the accounts receivable could be very old, but they are "hidden" because other customers paid quickly.)
Turnover ratios are more accurate when they use the asset's average balances for the year (as opposed to one balance at the final instant of the accounting year). The reason is that an income statement amount reflects the total activity during the entire year.
You can also read our Explanation of Financial Ratios.