Efficiency Ratios

Cash Turnover:

Measures how effective a company is utilizing its cash.

Formula:

Net Sales
Cash

Sales to Working Capital (Net Working Capital Turnover):

Indicates the turnover in working capital per year. A low ratio indicates inefficiency, while a high level implies that the company’s working capital is working too hard.

Formula:

Net Sales
Average Working Capital

Total Asset Turnover:

Measures the activity of the assets and the ability of the business to generate sales through the use of the assets.

Formula:

Net Sales
Average Total Assets

Fixed Asset Turnover:

Measures the capacity utilization and the quality of fixed assets.

Formula:

Net Sales
Net Fixed Assets

Days’ Sales in Receivables:

Indicates the average time in days, that receivables are outstanding (DSO). It helps determine if a change in receivables is due to a change in sales, or to another factor such as a change in selling terms. An analyst might compare the days’ sales in receivables with the company’s credit terms as an indication of how efficiently the company manages its receivables.

Formula:

Gross Receivables
Annual Net Sales / 365

Accounts Receivable Turnover:

Indicates the liquidity of the company’s receivables.

Formula:

Net Sales
Average Gross Receivables

Accounts Receivable Turnover in Days:

Indicates the liquidity of the company’s receivables in days.

Formula:

Average Gross Receivables
Annual Net Sales / 365

Days’ Sales in Inventory:

Indicates the length of time that it will take to use up the inventory through sales.

Formula:

Ending Inventory
Cost of Goods Sold / 365

Inventory Turnover:

Indicates the liquidity of the inventory.

Formula:

Cost of Goods Sold
Average Inventory

Inventory Turnover in Days:

Indicates the liquidity of the inventory in days.

Formula:

Average Inventory
Cost of Goods Sold / 365

Operating Cycle:

Indicates the time between the acquisition of inventory and the realization of cash from sales of inventory. For most companies the operating cycle is less than one year, but in some industries it is longer.

Formula:

Accounts Receivable Turnover in Days + Inventory Turnover in Day

Days’ Payables Outstanding:

Indicates how the firm handles obligations of its suppliers.

Formula:

Ending Accounts Payable
Purchases / 365

Payables Turnover:

Indicates the liquidity of the firm’s payables.

Formula:

Purchases
Average Accounts Payable

Payables Turnover in Days:

Indicates the liquidity of the firm’s payables in days.

Formula:

Average Accounts Payable
Purchases / 365

 

Post Author: Muraya Muya