Glossaries - Report Companions: Financial Analysis Edge - Efficiency Ratios
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)
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
Related financial ratio: Total Asset Turnover