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Category Archives for "Efficiency Ratio"

Cash Flow to Sales Ratio

This is an ultimate guide on how to calculate Operating Cash Flow to Sales Ratio with detailed interpretation, analysis, and example. You will learn how to use its formula to assess a company's efficiency.

Definition - What is Operating Cash Flow to Sales Ratio?

The operating cash flow to sales ratio (OCF/S) is the ratio of a company's operating cash flow and its net sales.

This ratio is used to compare a company’s sales revenues with its cash flow from operations, thereby revealing how well the company can generate cash flows from its sales.

It is important for a business to root its success not only in sales or revenue figures, but also in cashflow. This is especially true for companies with long-standing receivables.

As an investor, you don’t want to invest in a company that has cash problems since cash is one of the most important factors that creates “value” in a business.

While seeing an exciting swell of figures in the revenue line may make you want to turn your money in immediately, you need to inspect if these figures have actually materialized into something tangible and usable by the business.

This is where you want to check the operating cash flow figure, which indicates how the money flows into a business from its operating activities.

The OCF to sales ratio is a very useful metric for evaluating a company’s efficiency.

Not only will it help you understand how a business generates cash flow from its sales, but this ratio also will tell you if that business has any problems with its accounts receivable.​

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Days Working Capital

This is a complete guide on how to calculate Days Working Capital Ratio with detailed interpretation, example, and analysis. You will learn how to use its formula to assess a company's efficiency.

Definition - What is Days Working Capital?

The days working capital of a company is the average number of days the business takes to convert its working capital (WC) into revenue.

It reflects how efficient the company is at managing its short-term liquidity position and is a standard measure of the overall health of a business.

A high number of days working capital suggest that the company takes more time to convert its working capital into sales and is subsequently less efficient.

On the other hand, the fewer the working capital days, the better as it implies that the company is much more efficient.

Investors would use days working capital as a valuable tool when appraising a business.

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Days Cash on Hand

This is a complete guide on how to calculate Days Cash on Hand Ratio with thorough analysis, interpretation, and example. You will learn how to use its formula to evaluate a business efficiency.

Definition - What is Days Cash on Hand?

The days cash on hand represents the number of days a company can continue to pay its operating expenses with the current cash it has available.

Essentially it is the number of days a company can stay in business if it makes no sales and doesn’t collect any money from customers.

This is important to know especially if the company is at a early stage of its lifetime e.g. a start up when they are not making any cash sales or even due to seasonal cycles where there may be a slump in sales made.

Knowing how much money you have on hand allows you to adjust your expenditure if necessary and, if your days cash available figure starts to get too low, drastically cut back spending.

Typically, a company would look to achieve a days cash on hand figure of around 45 as this would provide enough time to look at adjusting expenditure and planning ways to improve sales and collect money from customers.

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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.

Definition - What is Accounts Payable Turnover Ratio?

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.

So what does accounts payable turnover mean?​​​

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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