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

* Featured Articles:

Debtors Turnover Ratio Examples

Investment Ratio Analysis and Example

Working Capital Turnover Ratio Analysis

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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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