The gross profit margin ratio, also known as gross profit percentage ratio, is a particularly important calculation to include in your analysis of a potential investment, because it discloses information about a company’s profitability.

More specifically, the gross profit margin ratio measures a firm’s revenues against the variable costs required to produce those revenues, in order to determine the percentage of profits that are being generated.

The ratio value demonstrates a company’s ability to operate cost-effectively, since the money that’s available to fund operations and future growth comes in large part from the profits that are created when goods or services are sold.

Another way to look at the gross profit rate is as a gauge of how efficiently a business is providing a service or product, in relation to the price its customers are willing to pay for it.

The less it costs to get a service or merchandise to market, the more profitable a company will be.

In measuring the rate at which a company’s merchandise is sold over a given period of time, the inventory turnover ratio compares average inventory levels against cost of goods sold.

When there’s a relatively low turnover of inventory, it can be an indication that poor planning is involved on the part of the firm’s management, or that the expected level of sales has declined for some reason.

Neither of these scenarios is desirable over the long run, since inventory that’s slow to turn over ties up a company’s working capital in an asset that can be difficult to liquidate.

As an investor, you can use this efficiency ratio to help determine whether the business you’re evaluating is being managed in an effective manner.

Proactive management is one of the key components of a firm’s successful financial performance and, as such, is one of the main factors you should consider as a potential shareholder.

The total asset turnover ratio is one of the many efficiency ratios that let you evaluate how well a company is using its assets to generate income.

​To accomplish this, the ratio directly measures a firm’s net sales against its average assets, to determine exactly what percentage of those sales is being produced from each dollar of a company’s resources.

An asset turnover ratio of 40%, for example, means that 40 cents out of every asset dollar is being converted into business revenue.

The higher the ratio is, the more efficiently a company is generating sales from its asset base.

An efficiency ratio measures how well a company uses its assets to generate income.

As one measure of this efficiency, the accounts receivable turnover ratio, which is often known as debtors turnover ratio, allows you to calculate how often a business collects its outstanding customer payments on an annual basis.​

This is important information to acquire when you’re analyzing a potential investment because a company’s accounts receivable (AR) do not become usable cash until they’ve been collected from clients.

If a business is not very efficient at converting its outstanding credit sales into cash on a regular basis, it may appear asset-rich, but a large portion of its assets won’t be very liquid.

Efficiency and liquidity both play integral roles in determining whether a firm will have the money to pay its bills on time and the means to consistently support its regular business operations, without additional funding.