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    What Do Efficiency Ratios Measure

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    Darlene Sarcino
    Efficiency ratios measure a company's ability to use its assets and manage its liabilities effectively in the short term. There are several key efficiency ratios including the inventory turnover ratio, asset turnover ratio, and receivables turnover ratio. These ratios measure how efficiently a company uses its assets to generate revenue and manage those assets by comparing things like cost of goods sold to average inventory, revenue to total assets, and net credit sales to average accounts receivable. Analysts use efficiency ratios to evaluate how well a company is managing its resources.

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    What Do Efficiency Ratios Measure

    Uploaded by

    Darlene Sarcino
    17 views2 pages
    Efficiency ratios measure a company's ability to use its assets and manage its liabilities effectively in the short term. There are several key efficiency ratios including the inventory turnover ratio, asset turnover ratio, and receivables turnover ratio. These ratios measure how efficiently a company uses its assets to generate revenue and manage those assets by comparing things like cost of goods sold to average inventory, revenue to total assets, and net credit sales to average accounts receivable. Analysts use efficiency ratios to evaluate how well a company is managing its resources.

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    Efficiency ratios measure a company's ability to use its assets and manage its liabilities effectively in the short term. There are several key efficiency ratios including the inventory turnover ratio, asset turnover ratio, and receivables turnover ratio. These ratios measure how efficiently a company uses its assets to generate revenue and manage those assets by comparing things like cost of goods sold to average inventory, revenue to total assets, and net credit sales to average accounts receivable. Analysts use efficiency ratios to evaluate how well a company is managing its resources.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    17 views2 pages

    What Do Efficiency Ratios Measure

    Uploaded by

    Darlene Sarcino
    Efficiency ratios measure a company's ability to use its assets and manage its liabilities effectively in the short term. There are several key efficiency ratios including the inventory turnover ratio, asset turnover ratio, and receivables turnover ratio. These ratios measure how efficiently a company uses its assets to generate revenue and manage those assets by comparing things like cost of goods sold to average inventory, revenue to total assets, and net credit sales to average accounts receivable. Analysts use efficiency ratios to evaluate how well a company is managing its resources.

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    © All Rights Reserved
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    What Do Efficiency Ratios Measure?

    Efficiency ratios measure a company's ability to use its assets and manage its
    liabilities effectively in the current period or in the short-term. Although there are
    several efficiency ratios, they are similar in that they measure the time it takes to
    generate cash or income from a client or by liquidating inventory.

    Efficiency ratios include the inventory turnover ratio, asset turnover ratio,
    and receivables turnover ratio. These ratios measure how efficiently a company
    uses its assets to generate revenues and its ability to manage those assets. With
    any financial ratio, it's best to compare a company's ratio to its competitors in the
    same industry.

    Inventory Turnover Ratio


    The inventory turnover ratio measures a company's ability to manage its
    inventory efficiently and provides insight into the sales of a company. The ratio
    measures how many times the total average inventory has been sold over the
    course of a period. Analysts use the ratio to determine if there are enough sales
    being generated to turn or utilize the inventory. The ratio also shows how well
    inventory is being managed including whether too much or not enough inventory
    is being bought.

    The ratio is calculated by dividing the cost of goods sold by the average
    inventory.

    For example, suppose Company A sold computers and reported the cost of
    goods sold (COGS) at $5 million. The average inventory of Company A is $20
    million. The inventory turnover ratio for the company is 0.25 ($5 million/$20
    million). This indicates that Company A is not managing its inventory properly
    because it only sold a quarter of its inventory for the year.

    Asset Turnover Ratio


    The asset turnover ratio measures a company's ability to efficiently generate
    revenues from its assets. In other words, the asset turnover ratio calculates sales
    as a percentage of the company's assets. The ratio is effective in showing how
    many sales are generated from each dollar of assets a company owns.

    A higher asset turnover ratio means the company's management is using its
    assets more efficiently, while a lower ratio means the company's management
    isn’t using its assets efficiently.
    The ratio is calculated by dividing a company's revenues by its total assets. For
    example, suppose a company has total assets of $1,000,000 and sales or
    revenue of $300,000 for the period. The asset turnover ratio would equal 0.30,
    ($300,000/$1,000,000). In other words, the company generated 30 cents for
    every dollar in assets.

    Receivables Turnover Ratio


    The receivables turnover ratio measures how efficiently a company can actively
    collect its debts and extend its credits. The ratio is calculated by dividing a
    company's net credit sales by its average accounts receivable.

    For example, a company has an average accounts receivables of $100,000,


    which is the result after averaging the beginning balance and ending balance of
    the accounts receivable balance for the period. The sales for the period were
    $300,000, so the receivable turnover ratio would equal 3, meaning the company
    collected its receivables three times for that period.

    Typically, a company with a higher accounts receivables turnover ratio relative to


    its peers is favorable. A higher receivables turnover ratio indicates the company
    is more efficient than its competitors when collecting accounts receivable.

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