Efficiency Ratios

Efficiency ratios are used to measure the ability of a company to use its assets to earn revenue. In this section, we cover the most important efficiency ratios you need to know.

What are efficiency ratios?

Efficiency ratios, also known as activity ratios, determine how efficient a company is in using its assets to earn an income. Efficiency ratios usually consider the time element involved in a company’s collection process – in short, how long it takes for their inventory to clear and be converted into sales. Management uses such numbers to help enhance a business’ image in the eyes of potential investors and creditors.

Efficiency ratios are often considered side by side with profitability ratios. In most cases, companies that are more efficient with their resources are also more profitable. Perfect examples are multinational retail corporations that successfully sell high volumes of low margin products.

These businesses are highly efficient in terms of asset turnover, and while they only earn a small amount from every sale, they make tons of sales that all add up to enormous overall profits.

List of efficiency ratios

Below is the complete list of efficiency ratios we have covered. Each will provide a detailed overview of the ratio, what it’s used for, and why.

They also explain the formula behind the ratio and provide examples and analysis to help you understand them.

More financial ratios