The most common leverage ratio is called, simply, the debt ratio: total liabilities divided by total liabilities plus capital.
Turnover.
The turnover ratios focus on the operating cycle of your business by examining its cash flow. They show the amount of time it takes for cash to move through the accounts receivable, inventory account, and accounts payable in your business.
It is important to know how many days it takes your company to purchase inventory, pay for it, sell it, and collect the cash for the sales. Credit sales may not actually produce cash for 30 to 60 days. If you don’t understand this cycle you can find that you have to pay for new supplies before your customers have paid you.
Gaining an understanding of the cash flow of your business is the most important financial planning tool you have. An examination of the turnover ratios can help you to understand the operating cycle in your business.
The three turnover ratios are the collection period ratio, the days to sell inventory ratio, and the days purchases in accounts payable ratio.
