Efficiency ratios are used to measure the ability of a company to use its assets to earn revenue. In this section, we cover the most important efficiency ratios you need to know.
What are efficiency ratios?
Efficiency ratios, also known as activity ratios, determine how efficient a company is in using its assets to earn an income. Efficiency ratios usually consider the time element involved in a company’s collection process – in short, how long it takes for their inventory to clear and be converted into sales. Management uses such numbers to help enhance a business’ image in the eyes of potential investors and creditors.
Efficiency ratios are often considered side by side with profitability ratios. In most cases, companies that are more efficient with their resources are also more profitable. Perfect examples are multinational retail corporations that successfully sell high volumes of low margin products.
These businesses are highly efficient in terms of asset turnover, and while they only earn a small amount from every sale, they make tons of sales that all add up to enormous overall profits.
List of efficiency ratios
Below is the complete list of efficiency ratios we have covered. Each will provide a detailed overview of the ratio, what it’s used for, and why.
They also explain the formula behind the ratio and provide examples and analysis to help you understand them.
- Asset Turnover
- Inventory Turnover
- Net Income
- Accounts Receivables Turnover
- Sales to Administrative Expense (SAE) Ratio
- Gross vs Net Income
- Return on Operating Assets (ROOA)
- Accounts Payable Turnover Ratio
- Equity Multiplier
- Days Sales in Inventory (DSI)
- Fixed Asset Turnover Ratio (FAT)
- Days Working Capital
- Working Capital Turnover Ratio
- Days Cash on Hand
- Capital Intensity Ratio
- Sales to Equity Ratio
- Inventory to Sales Ratio
- Sales to Fixed Assets Ratio
- Repairs and Maintenance Expense to Fixed Assets Ratio
- Investment Turnover Ratio
- Sales to Operating Income Ratio
More financial ratios
1. What are efficiency ratios?
Efficiency ratios are used to measure the ability of a company to use its assets to earn revenue. It usually considers the time element involved in a company’s collection process – in short, how long it takes for their inventory to clear and be converted into sales.
2. Why are efficiency ratios important?
Efficiency ratios are important because they determine how efficient a company is in using its assets to earn an income. In most cases, companies that are more efficient with their resources are also more profitable.
In addition, efficiency ratios can be used to help enhance a business's image in the eyes of potential investors and creditors.
3. What are some of the most common efficiency ratios?
The most common efficiency ratios are asset turnover, inventory turnover, receivables turnover, and payables turnover.
4. What is a good efficiency ratio?
An efficiency ratio of 50% or under is usually considered good. However, this varies depending on the industry you’re in.
For example, a retail company with an asset turnover of 2 would be considered very efficient, while a technology company with an asset turnover of 10 would be considered inefficient.
However, if the efficiency ratio increases over time, it might be a sign that the company is becoming less efficient. This is because a high-efficiency ratio usually means the company is selling more products at a lower margin.
5. How can I improve my company’s efficiency ratios?
There are a few things you can do to improve your company’s efficiency ratios. One is to make sure your inventory is well organized and that you have an effective system for tracking it.
You should also make sure your sales process is as efficient as possible, and that you have systems in place to collect payments quickly and accurately. Finally, you should make sure you’re paying your suppliers on time.