Evaluate how efficiently a business uses assets to generate revenue
Download the free financial ratio ebook and find out which four ratios to use to evaluate the efficiency of any business.
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.
- Accounts Payable Turnover RatioAccounts payable turnover ratio (APTR) is a financial ratio of the net credit purchases of a business to its average accounts payable for one year.
- Accounts Receivables TurnoverThe accounts receivables turnover is a calculation to measure how successful a company is in collecting money owed to them from customers.
- Asset TurnoverThe asset turnover ratio is a way to measure the value of a company’s sales compared to the value of the company’s assets.
- Capital Intensity RatioCapital intensity ratio (CIR) is a metric that shows you how much capital is needed to generate $1 of revenue.
- Cash Turnover Ratio (CTR)The cash turnover ratio (CTR) a profitability and efficiency ratio that measures how many times a company uses its cash to generate revenues.
- Days Cash on HandDays cash on hand is the number of days a company can keep up with its operating expenses using the cash available in the business.
- Days Sales in Inventory (DSI)Days sales in inventory (DSI) refers to a financial ratio showing the number of days a company takes to turn over all its inventory.
- Days Working CapitalDays working capital is a measurement that reports the number of days it takes for the working capital to be converted into revenue.
- Equity MultiplierThe equity multiplier is a ratio that determines how much of a company’s assets is funded or owed by its shareholders, by comparing its total assets against total shareholder’s equity.
- Fixed Asset Turnover Ratio (FAT)Fixed asset turnover ratio (FAT) is an indicator measuring a business efficiency in using fixed assets to generate revenue.
- Gross vs Net IncomeGross and net income are often mixed up when talking about the financials of a business.
- Inventory to Sales RatioInventory to sales is an efficiency ratio that is used to determine the rate at which the company is liquidating its inventory.
- Inventory TurnoverInventory turnover is an efficiency ratio that shows how many times a company sells and replaces inventory in a given time period.
- Investment Turnover RatioThe investment turnover ratio is a financial tool used to determine how efficiently a company is generating revenues using their debts and equity.
- Net IncomeNet income, also known as net profit or net earnings, is the amount of revenue left over after deducting total expenses.
- Repairs and Maintenance Expense to Fixed Assets RatioThe repairs and maintenance expenses to fixed assets ratio is a measurement that evaluates and compares the total amount spent for repairs and maintenance against the total value of the assets being repaired and maintained.
- Return on Operating Assets (ROOA)The return on operating assets (ROOA) is a ratio that shows how efficient a company is in using its revenue-earning assets.
- Sales to Administrative Expense (SAE) RatioThe sales to administrative expense ratio (SAE) is a financial metric that assesses a company’s ability to handle its non-operating expense to help other operations to bring in more sales.
- Sales to Equity RatioSales to equity is an efficiency ratio that measures the company’s ability to use shareholders’ capital to generate sales.
- Sales to Fixed Assets RatioThe sales to fixed assets ratio, also known as the fixed asset turnover ratio, measures the efficiency of a business in using fixed assets to generate revenue.
- Sales to Operating Income RatioSales to operating income is an efficiency ratio that is used by companies to see how a company’s net sales compares to its operating income.
- Working Capital Turnover RatioWorking capital turnover, also known as net sales to working capital, is an efficiency ratio used to measure how the company is using its working capital to support a given level of sales.