Profit Margin

Profit margin:

A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.

Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20\% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.

Inventory Turnover:

Inventory turnover ratio is used to measure the inventory management efficiency of a business. In general, a higher value of inventory turnover indicates better performance and lower value means inefficiency in controlling inventory levels. A lower inventory turnover ratio may be an indication of over-stocking which may pose risk of obsolescence and increased inventory holding costs. However, a very high value of this ratio may be accompanied by loss of sales due to inventory shortage.

Receivable Turnover Ratio is one of the accounting activity ratios, a financial ratio. This ratio measures the

Average Collection Period = Net receivable sales/ Average net receivables

The average collection period is the average number of days between 1) the date that a credit sale is made, and 2) the date that the money is received from the customer. The average collection period is also referred to as the days' sales in accounts receivable.

The average collection period can be calculated as follows: 365 days in a year divided by the accounts receivable turnover ratio. Assuming that a company has an accounts receivable turnover ratio of 10 times per year, the average collection period is 36.5 days (365 divided by 10).

An alternate way to calculate the average collection period is:  the average accounts receivable balance divided by average credit sales per day.

If a company offers credit terms...