Level 6 · Financial Ratios
Turnover Ratios
How fast the business converts stock and invoices back into cash.
In this lesson
What you'll be able to do
- Calculate inventory turnover and days
- Calculate receivable and payable days
- Compute the cash conversion cycle
- Interpret efficiency trends
Think about it
How can a company sell goods, collect the money later, and still hold negative working capital?
Story
Let's picture it
A vegetable vendor buys stock in the morning, sells it by evening, and pays the wholesaler the next week. Money comes in before it goes out. A machine-tool manufacturer builds for six months, ships, then waits ninety days for payment, while paying steel suppliers immediately. Same profit margin, entirely different cash lives.
Visual
The cash conversion cycle
- 1
Inventory days
How long stock sits before being sold
- 2
+ Receivable days
How long customers take to pay after the sale
- 3
− Payable days
How long the company takes to pay its own suppliers
- 4
= Cash conversion cycle
Days of cash tied up in the operating cycle
Plain English
The simple explanation
Turnover ratios measure operating efficiency. Inventory turnover is cost of goods sold divided by average inventory; divide 365 by it to get inventory days.
Receivable days show how long customers take to pay; payable days show how long the company takes to pay suppliers. Together with inventory days they form the cash conversion cycle.
A shorter cycle means less capital tied up in operations. A negative cycle, collecting before paying, is a powerful structural advantage found in some retail and platform businesses.
Real world
Organised retail and FMCG distribution
Businesses that sell largely for cash while enjoying credit from suppliers can operate with negative working capital, effectively funding growth with suppliers' money rather than borrowings.
Watch out
Common mistakes
- Comparing turnover ratios across unrelated industries.
- Missing a steady rise in receivable days.
- Assuming fast inventory turnover always means efficiency, it can mean stock-outs.
Did you know?
Rising receivable days is one of the earliest quantitative signals that revenue quality is deteriorating, often visible well before profit falls.
Your turn
Mini challenge
Calculate the cash conversion cycle for one company across three years. Is it lengthening?
Quick quiz
1 / 5
Wrap up
Summary
Turnover ratios and the cash conversion cycle reveal how efficiently a business turns stock and invoices back into cash, and how much funding its growth will need.
- Inventory days, receivable days, payable days
- CCC = inventory + receivables − payables
- Rising receivable days is an early warning
- Negative CCC is a structural advantage
Revise