Efficiency Ratios

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What is the efficiency ratio?

With the help of the efficiency ratios, the effective management of the routine tasks of the company is measured and determined. According to the concept, the efficiency ratio helps in finding out the proper utilization of the assets and management of the liabilities. The calculation of the turnover of the receivables, repayment of the liabilities, the quantity and usage of equity, and general use of the inventory and the machinery. Another purpose of this ratio is to keep a record and examine the performance of the investment banks. A well-managed organization has reduced the net investments of the assets, and hence, requires less capital and debt with the motive of surviving in the operations.

Types of Efficiency Ratios

An efficient comparison can be made between the assets at the time of controlling the debts with the use of various other ratios.

  1. Accounts receivable turnover

The accounts receivable turnover ratio is used for the measurement of the efficiency and the effectiveness of the credit policies of the company. If the accounts receivable turnover is very low, it may show that the company is finding it extremely difficult to work on the debt from the customers. it is recommended to have a high account turnover.

Accounts receivable turnover= revenue/ average accounts receivables

  1. Inventory turnover

The inventory turnover will help in defining, the well-management of the inventory levels of the company. If the outcome, comes out to be very low, it means that the stock is being collected or problems are being faced at the time of selling out the products to the customers. therefore, the level of inventory is considered to the best when the ratio comes out to be high.

Inventory turnover= cost of sales/ average inventory

  1. Accounts payable turnover

With the help of this ratio, it can be found out that if the company has enough and sufficient resources that can be sued further in order to pay off all the immediate expenses or the obligations. If the number comes out to be greater, it means that the company is not having a healthy and strong financial state and it is opposite in the other case.

Accounts payable turnover= cost of sales/ average accounts payable.

  1. Total assets turnover

The efficiency of the working of the short and the long term assets can be reflected with the help of the total asset turnover. The ideal figure is a high total asset turnover.

Total asset turnover= revenue/ average total assets

  1. Fixed asset turnover

This type of ratio is similar to that of the total asset turnover ratio, still there exist some differences. Fixed assets that include property, plant, and equipment or non-current assets refers to the assets that cannot be converted into the monetary terms in an easy way. If the ratio comes out to be low, it shows that a lot of investment has been made in the fixed assets.

Fixed asset turnover= net sales/ average net fixed assets or

Fixed asset turnover= revenue/ average fixed assets

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