Efficiency Ratios

Concept

How Well Assets Are Used

Efficiency ratios measure how effectively a company uses its assets. Inventory Turnover = COGS / Average Inventory. A/R Turnover = Net Credit Sales / Average A/R. Days Sales in Receivables = 365 / A/R Turnover. Asset Turnover = Net Sales / Average Total Assets.

Example

Calculating Turnover

COGS: $300,000 | Avg Inventory: $50,000 Net Credit Sales: $500,000 | Avg A/R: $62,500 Inventory Turnover = $300K / $50K = 6.0 times per year Days in Inventory = 365 / 6.0 = 60.8 days A/R Turnover = $500K / $62.5K = 8.0 times Days Sales in A/R = 365 / 8.0 = 45.6 days

Key Point

Industry Benchmarks

Ratios are most meaningful when compared to industry averages and trends over time. A grocery store will have much higher inventory turnover than a furniture store.

Solvency Ratios

Horizontal & Vertical Analysis

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