Turnover ratios are the family of measures that set a period’s flow against the average balance that carried it. The flow is normally an income statement amount and the balance is a balance sheet one, so the answer is a count of times per period rather than a percentage or a dollar figure, and a higher count reads as faster. Turnover ratio, activity ratio and, in one of its two senses, efficiency ratio all name this same family, so a figure published under any of them says nothing until the member is named.
No accounting standard fixes the family’s membership or the wording of any member, and ratios of this kind are calculated from information on financial statements rather than presented on them (SEC, Beginners’ Guide to Financial Statements).
The Naming Problem
Three labels sit on one construction, and none of them says which flow went on top or which balance sat underneath. A client pack headed activity ratios has named the family and stopped there. Efficiency ratio carries the further hazard of a second, unrelated sense used in banking, where the direction reverses, and that split is worked through in efficiency ratio.
Which Member the Figure Names
Each member picks its own flow and its own balance, and each is worked in full where it lives. Accounts receivable turnover reads the balance owed by customers, inventory turnover reads inventory and argues there why cost rather than sales belongs on top, AP turnover reads the balance owed to suppliers on a numerator no statement caption reports, and asset turnover ratios take the whole asset base rather than one balance inside it.
The Two Conventions Behind Any Turnover Ratio
Two choices travel with every member, and no rule settles either.
The first is the balance underneath. The one family member the SEC’s guide works through averages the two balance sheet dates, adding the balance for the period of the report to the balance for the previous comparable period and dividing by two (SEC, Beginners’ Guide to Financial Statements). A closing-date balance is the common alternative, and it answers differently off identical trading.
flow for the period 600,000
balance at the start of the period 80,000
balance at the close of the period 120,000
average balance (80,000 + 120,000) / 2 = 100,000
on the average 600,000 / 100,000 = 6.0 times
on the close 600,000 / 120,000 = 5.0 timesThe trading is the same on both lines, so two counts belong side by side only when both were built the same way.
The second choice is the unit. The same count can be published in days instead of times, and the direction inverts when it is, which is the form days sales outstanding and days inventory outstanding take for two of the members.
The Fund Measure With the Same Name
A turnover published as a percentage is usually not an activity ratio at all. A mutual fund’s prospectus normally discloses a portfolio turnover rate as a percent of the average value of its portfolio, computed as the lesser of the fund’s purchases or sales of portfolio securities for the fiscal year divided by the monthly average value of the securities it held (SEC, Form N-1A, Item 3 and Item 13). It reports how much of a portfolio was traded, and it shares nothing with a business’s activity ratios except the word.
Common Questions
No authority sets one, and at family level the question has no answer, since the members do not share a scale. Desirable ratios vary by industry as a general rule (SEC, Beginners’ Guide to Financial Statements), so a comparison holds only inside one member, one industry and one convention.
It is a different measure wearing the family’s name: either a fund’s portfolio turnover rate, or staff turnover, the share of people who left over a period, which is the sense costed in the cost of employee turnover in an accounting firm.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a trial task lets a firm grade a real block of its own close work before a ratio pack is built on it.
