Category Archives for "Efficiency Ratio"

Inventory Turnover Ratio

This is an all-in-one guide on how to calculate Inventory Turnover ratio with in-depth interpretation, analysis, and example. You will learn how to utilize this ratio's formula to evaluate a company's efficiency.

What is The Inventory Turnover Ratio?​

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.

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Total Asset Turnover Ratio

This is an ultimate guide on how to calculate Total Asset Turnover ratio with detailed interpretation, example, and analysis. You will learn how to use its formula to assess an organization's efficiency.

What is Total Asset Turnover?​

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.

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Accounts Receivable Turnover Ratio

This is a complete guide on how to calculate Accounts Receivable Turnover (A/R) ratio with detailed example, interpretation, and analysis. You will learn how to use its formula to evaluate a firm's efficiency.

What Does Accounts Receivable Turnover Mean?​

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.

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Accounts Payable Turnover Ratio

This is an advanced guide on how to calculate Accounts Payable Turnover (A/P) ratio with detailed interpretation, analysis, and example. You will learn how to use its formula to evaluate a company's efficiency.

What Does Accounts Payable Turnover Mean?​​

When you’re considering buying stock in a particular company, it can be helpful to know how efficient that company is at meeting its supplier debt obligations.

The accounts payable turnover ratio, which is also known as the creditors turnover ratio, provides you with just such an efficiency measurement.

This financial ratio allows you to compare a firm’s credit purchases against its average accounts payable (AP) amount, in order to determine how frequently it pays its suppliers.

If you discover that a business has a payable turnover ratio of 6, for example, it means the company you’re evaluating pays off its average supplier balance owing 6 times a year, or about every 60 days.

This information can be particularly useful when you’re analyzing ratio results over a period of time, because it lets you gauge any change in an organization’s payment habits.

A slowing trend in supplier payments often serves as a warning signal that a firm’s financial health may be declining.

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