Efficiency ratios are a group of financial ratios that measure a company's ability to manage its assets and liabilities efficiently to generate profits.
Here are some of the commonly used efficiency ratios in financial analysis:
Asset turnover ratio:
This ratio measures how efficiently a company is using its assets to generate revenue. It is calculated by dividing the company's revenue by its average total assets.
Formula: Asset Turnover Ratio = Revenue / Average Total Assets
Inventory turnover ratio:
This ratio measures the number of times a company sells and replaces its inventory within a given period. It is calculated by dividing the cost of goods sold by the average inventory balance.
Formula: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory Balance
Receivables turnover ratio:
This ratio measures how quickly a company collects cash from its customers. It is calculated by dividing the company's revenue by its average accounts receivable balance.
Formula: Receivables Turnover Ratio = Revenue / Average Accounts Receivable
Payables turnover ratio:
This ratio measures how quickly a company pays its suppliers. It is calculated by dividing the company's cost of goods sold by its average accounts payable balance.
Formula: Payables Turnover Ratio = Cost of Goods Sold / Average Accounts Payable
Working capital turnover ratio:
This ratio measures how efficiently a company is using its working capital to generate revenue. It is calculated by dividing the company's revenue by its working capital.
Formula: Working Capital Turnover Ratio = Revenue / Working Capital
Cash conversion cycle:
This ratio measures the time it takes a company to convert its resources into cash flow. It is calculated by adding the number of days it takes to sell inventory to the number of days it takes to collect accounts receivable and then subtracting the number of days it takes to pay accounts payable.
Formula: Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding
Fixed asset turnover ratio:
This ratio measures how efficiently a company uses its fixed assets to generate revenue. It is calculated by dividing the company's revenue by its average fixed assets.
Formula: Fixed Asset Turnover Ratio = Revenue / Average Fixed Assets
Sales to capital ratio:
This ratio measures how efficiently a company is using its capital to generate sales. It is calculated by dividing the company's revenue by its capital employed.
Formula: Sales to Capital Ratio = Revenue / Capital Employed
MORE ABOUT THEM
Asset turnover ratio: a higher ratio indicates more revenue per dollar of assets, while an extremely high ratio may indicate overreliance on assets.
Inventory turnover ratio: a high ratio suggests efficient inventory management, while a low ratio may indicate slow sales or excess inventory.
Receivables turnover ratio: a high ratio indicates efficient collection and better cash flow; a low ratio may indicate slow collections and cash flow problems.
Payables turnover ratio: a high ratio indicates prompt payment and good supplier relationships, while a very high ratio may indicate missed opportunities for credit.
Fixed asset turnover ratio: a higher ratio indicates more revenue per dollar of fixed assets; an extremely high ratio may indicate overreliance on those assets.
Cash conversion cycle: a shorter cycle improves cash flow, while a longer cycle may limit financing and growth opportunities.
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