Tips on Balance Sheet and Financial Ratios Research

Financial Ratios for Efficiency Measurement

These financial ratios are generally understood as measures of firm and industry efficiency:

1. Accounts Receivables Turnover
Sales/ Accounts Receivable

Related financial ratio: Collection Period or Day’s Receivables
Accounts Receivable Turnover X 365

This ratio is also listed in the explanation of Liquidity Ratios in the Financial Analysis Edge #6.

This ratio measures the number of times that receivables turn over during the year. The higher the turnover of receivables, the shorter the time between sale and cash collection. If a company's Turnover Rate is significantly lower than industry norms, the underlying reason (poor collection methods, high risk customers, low sales) needs to be pinpointed.

The Day’s Sales Receivables measures the average time in days that receivables are outstanding. The higher the number of days outstanding, the greater the collection risk. The day’s receivables rate may suggest a concern over credit control and collections.

2. Sales to Inventory (Inventory Turnover)
Sales/Inventory

This ratio gives a picture of how quickly inventory turns over. Ratios below the industry norm suggest high levels of inventory. High ratios could indicate product levels insufficient to satisfy demand in a timely manner.

3. Assets to Sales
Total Assets/Sales

Related financial ratio: Total Asset Turnover
Sales/Total Assets

This financial ratio indicates whether a company is handling too high a volume of sales in relation to investment. Very low percentages relative to industry norms might indicate overly conservative sales efforts or poor sales management.

4. Sales to Net Working Capital
Sales/Net Working Capital
note: Net Working Capital = (Current Assets-Current Liabilities)

This ratio is also discussed as a liquidity measure in the Financial Analysis Edge #6.

Net Working Capital levels higher than industry norms may indicate or a strain on available liquid assets, while low ratios may suggest too much liquidity – an inefficient use of capital. Working capital is a concern of measure of current creditors since it reflects ability to finance current operations. Comparing sales from operations to working capital indicates how well working capital is employed.

5. Accounts Payable to Sales
Accounts Payable/Sales

Related Financial Ratio: Accounts Payable Turnover
Sales/Accounts Payable

Accounts Payable to Sales measures the speed with which a company pays vendors relative to sales. Numbers higher than typical industry ratios suggest that the company is using suppliers to float operations.

6. Sales to Net Fixed Assets (Fixed Asset Turnover)
Sales/Fixed Assets

This ratio measures the productive use of a firm's fixed assets. Largely depreciated fixed assets or a labor intensive operation may cause a distortion of this ratio.

7. Sales Per Employee
Sales/Full Time Equivalent Employees

A non-traditional ratio which requires data (employment) outside the balance sheet.

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