MBA NOTES: EFFICIENCY RATIOS

EFFICIENCY RATIOS

Cash Turnover
Measures how effective a company is utilizing its cash.

Formula         Net Sales
                       Cash

Sales to Working Capital (Net Working Capital Turnover)

Indicates the turnover in working capital per year. A low ratio indicates inefficiency, while a high level implies that the company's working capital is working too hard.

Formula          Net Sales
                       Average Working Capital

Total Asset Turnover

Measures the activity of the assets and the ability of the business to generate sales through the use of the assets.

Formula          Net Sales
                        Average Total Assets

Fixed Assets Turnover
Measures the capacity utilization and the quality of fixed assets.

Formula           Net Sales
                         Net Fixed Assets

Day's Sales in Receivables

Indicates the average time in days, those receivables are outstanding (DSO). It helps determine if a change in receivables is due to a change in sales, or to another factor such as a change in selling terms. An analyst might compare the days sales in receivables with the company's credit terms as an indication of how efficiently the company manages its receivables.

Formula       Gross Receivables 
                     Annual Net Sales/365

Accounts Receivable Turnover
Indicates the liquidity of the company's receivables.

Formula       Net Sales
                     Average Gross Receivables

Accounts Receivable Turnover in Days
Indicates the liquidity of the company's receivable in days.

Formula         Average Gross Receivables
                       Annual Net Sales/365

Inventory Turnover
Indicates the liquidity of the inventory.

Formula             Cost of Goods Sold
                           Average Inventory

Inventory Turnover in Days
Indicates the liquidity of the inventory in days.

Formula            Average Inventory
                          Cost of Goods Sold / 365

Operating Cycle

Indicates the time between the acquisition of inventory and the realization of cash from sales of  inventory. For most companies the operating cycle is less than one year, but in some industries it is longer.

Formula          Accounts Receivable turnover in Days + Inventory Turnover in Day

Days Payables Outstanding
Indicates how the firm handles obligations of its suppliers.

Formula          Ending Accounts Payable
                        Purchases / 365


Payables Turnover
Indicates the liquidity of the firm's payables.

Formula      Purchases
                   Average Accounts

Payables Turnover in Days
Indicates the liquidity of the firm's Payables in days.

Formula     Average Accounts Payable
                   Purchases / 365

SYNOPSIS OF FINANCIAL ANALYSIS
FINANCIAL STATEMENTS / FINANCIAL REPORTS
USERS OF FINANCIAL STATEMENTS
TYPES OF FINANCIAL ANALYSIS
TOOLS OF FINANCIAL ANALYSIS (METHODS)
RATIO ANALYSIS
CLASSIFICATION OF RATIOS
LIQUIDITY RATIOS
PROFITABILITY RATIOS
LEVERAGE RATIO
EFFICIENCY RATIO


MBA NOTES