Efficiency Ratio Analysis & Example

Definition: Efficiency Ratios (also known as Activity ratios) are used to measure the effectiveness of the firm's use of resources.

Formula:
1) Average Collection Period = (Average Trade Debtors / Credit Sales) * No. of Days
2) Average Payment Period = (Average Trade Creditors / Credit Purchases) * No. of Days
3) Inventory Turnover Ratio = Cost of goods sold / Average inventory held
4) Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors
5) Total Assets Turnover = Net Sales / Total Assets
6) Degree of Operating Leverage = % change in EBIT / % change in Sales
7) Creditors Turnover Ratio = Net Credit Purchases / Average Payable
8) Days Sales Outstanding Ratio = Accounts Receivable / Average sales per day
9) Working capital turnover Ratio = Cost of sales / Average net working capital
10) Current Asset Turnover Ratio = Cost of goods sold / Current assets
11) Stock Turnover Period = (Average stock / Cost of goods sold) * No. of Days
12) Cash Cycle = Stock Turnover Period + Average Collection Period - Average Payment Period

Example:
Emily Ltd has the following information:
Trade debtors $100,000
Trade creditors $80,000
Credit sales $300,000
Credit purchases $120,00
Cost of sales $70,000
Opening stock $60,000
Closing stock $20,000
Bank $66,000
Calculate the relevant Efficiency Ratios.

Solution:
Average Collection Period = (100,000 / 300,000) * 365 = 121.7 days
Average Payment Period = (80,000 / 120,000) * 365 = 243.3 days
Current Asset Turnover = 70,000 / (100,000 + 20,000 + 66,000) = 0.38
Average stock = (60,000 + 20,000) / 2 = $40,000
Stock Turnover Period = (40,000 / 70,000) * 365 = 208.6 days
Cash Cycle = 208.6 + 121.7 - 243.3 = 87 days

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