Glossary – Formulas

A

Asset Turnover Ratio – A financial ratio which measures a company’s efficiency at using its assets to generate sales or revenue. In other words, the amount of sales it achieves in rand terms, measured against every rand in assets it employs to achieve that sale. For investors and shareholders, the higher the number the better, as it indicates greater efficiency and a high profit margin. The formula for measuring asset turnover is:

Sales divided by Assets. Typically, ‘assets’ will be ‘total assets’, which comprises fixed + current assets.


B


C

Click-Through Rate – Also frequently referred to as ‘CTR’, it is a marketing term for measuring the success of an online advertising campaign. It is defined as the number of times an ad is clicked on, divided by the number of times the ad is shown to online users (impressions), expressed as a percentage. For example, if an ad delivers 100 impressions and is clicked on once, then the CTR is 1%. The relevance of CTR has fallen in recent times, with marketers now more interested in ‘conversion rates’.

Cost of Goods Sold – Also known as COGS, it is the direct cost involved in producing the goods sold by a company, including materials and labour. However, it excludes indirect expenses such as distribution, marketing and sales. The direct costs of producing the goods are entered as expenses in the company’s books only at the time that the goods are actually sold. A common formula to determine COGS is:

            Beginning inventory + purchases – ending inventory = cost of goods sold

So, if a business has R20 million in inventory, makes R4 million in purchases and ends with R18 million in inventory, the cost of goods for the period would be R6 million (R20 million + R4 million – R18 million).

Cost of Sales(COGS) – it is the direct cost involved in producing the goods sold by a company, including materials and labour. However, it excludes indirect expenses such as distribution, marketing and sales. The direct costs of producing the goods are entered as expenses in the company’s books only at the time that the goods are actually sold. A common formula to determine COGS is:

            Beginning inventory + purchases – ending inventory = cost of goods sold

So, if a business has R20 million in inventory, makes R4 million in purchases and ends with R18 million in inventory, the cost of goods for the period would be R6 million (R20 million + R4 million – R18 million).


D

Direct Cost of Sales(COGS) – it is the direct cost involved in producing the goods sold by a company, including materials and labour. However, it excludes indirect expenses such as distribution, marketing and sales. The direct costs of producing the goods are entered as expenses in the company’s books only at the time that the goods are actually sold. A common formula to determine COGS is:

            Beginning inventory + purchases – ending inventory = cost of goods sold

So, if a business has R20 million in inventory, makes R4 million in purchases and ends with R18 million in inventory, the cost of goods for the period would be R6 million (R20 million + R4 million – R18 million)


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I

Inventory Turnover – An accounting measure of the number of times that the average inventory on hand is sold and replaced during a given timeframe, usually a month or financial year. A low figure may indicate poor sales strategies, incorrect reading of market requirements, or over-stocking. Conversely, a high figure indicates the opposite and is a positive sign for the business. The equation to determine Inventory Turnover is:

Cost of good sold ÷ by average inventory = inventory turnover


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M


N


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P


R

Receivables Turnover – An accounting term which describes a company’s efficiency in extending credit to its customers and collecting its debts. A high Receivables Turnover ratio indicates that a business has efficient credit and collection policies (or that it deals in cash). Conversely, a low ratio indicates it is not properly assessing the creditworthiness of its customers, and/or that collection procedures are inefficient. The ratio is measured via the following formula:

Net credit sales ÷ Average accounts receivable

Return on Investment (ROI) – It is a measurement of the earnings which have been generated by the invested capital in a business. The figure tells investors, the board of directors, and senior management how effective the company was in converting that capital into investments of value. The ideal is to make large profits from little investment. ROI is measured as a percentage and the formula is calculated as follows:

Return on Assets(ROA)– It is a measurement of the earnings which have been generated by the invested capital in a business. The figure tells investors, the board of directors, and senior management how effective the company was in converting that capital into assets of value. The ideal is to make large profits from little investment. ROA is measured as a percentage and the formula is calculated as follows: Net income ÷ Total assets


S

Stock Turnover(Inventory Turnover)  It is an accounting measure of the number of times that the average stock on hand is sold and replaced during a given timeframe, usually a month or financial year. A low figure may indicate poor sales strategies, incorrect reading of market requirements, or over-stocking. Conversely, a high figure indicates the opposite and is a positive sign for the business. The equation to determine Stock Turnover is:

Cost of good sold ÷ by average stock = stock turnover


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XYZ


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