Efficiency ratios

u— title: Efficiency Ratios excerpt: ‘Financial metrics measuring how effectively a company uses its assets and manages its liabilities, including asset turnover, inventory turnover, and receivables turnover ratios.’ categories:

• Financial Analysis and Ratios
• Operational Performance
• Management Effectiveness published: true

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Efficiency Ratios

Financial metrics that measure how effectively a company uses its assets and manages its liabilities to generate revenue and profits, indicating operational performance and management effectiveness.

For example, key efficiency ratios include:

• Asset turnover (sales ÷ average total assets): A manufacturer with $100 million in sales and $50 million in average assets would have a 2.0 ratio, meaning it generates $2 in sales for every $1 in assets.
• Inventory turnover (cost of goods sold ÷ average inventory): A retailer with $60 million in COGS and $10 million in average inventory would have a 6.0 ratio, indicating it sells and replaces inventory six times per year.
• Receivables turnover (net credit sales ÷ average accounts receivable): A distributor with $80 million in credit sales and $16 million in average receivables would have a 5.0 ratio, collecting its receivables five times annually.

Efficiency ratios help evaluate how well a company manages key operational elements like inventory, receivables, payables, and assets. Higher ratios generally indicate better performance, though optimal levels vary significantly by industry. Trends in these ratios can reveal improving or deteriorating operational efficiency more effectively than single-period measurements.