How to Calculate Efficiency Ratio

Efficiency ratios measure how effectively the company manages its assets and liabilities. Some of the most commonly used efficiency ratios include Inventory Turnover Ratio, Days Sales Outstanding Ratio, Working Capital Turnover Ratio, etc. Learn how to calculate these ratios with the following example:

Calculate the relevant efficiency ratios, given the following information:
Accounts payables $380,000
Accounts receivables $290,000
Credit sales $500,000
Cash sales $400,000
Credit purchases $390,000
Cash purchases $40,000
Cost of sales $450,000
Opening inventory $100,000
Closing inventory $80,000
Bank $50,000
Buildings $600,000
Motor vehicles $110,000
Fixtures and fittings $70,000

Solution:
(1) Total Assets Turnover = Net Sales / Total Assets = (500,000 + 400,000) / 1,200,000 = 0.75 times
(2) Inventory Turnover Ratio = Cost of sales / Average inventory held = 450,000 / 90,000 = 5 times
(3) Inventory Turnover Period = (Average inventory / Cost of sales) * 365 Days = (90,000 / 450,000) * 365 = 73 days
(4) Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts receivables = 500,000 / 290,000 = 1.72 times
(5) Average Collection Period = (Average receivables / Credit Sales) * 365 Days = (290,000 / 500,000) * 365 = 211.7 days
(6) Accounts Payable Turnover Ratio = Net Credit Purchases / Average payables = 390,000 / 380,000 = 1.03 times
(7) Average Payment Period = (Average payables / Credit Purchases) * 365 Days = (380,000 / 390,000) * 365 = 355.6 days

Workings:
Fixed assets = Buildings + Motor vehicles + Fixtures and fittings = 600,000 + 110,000 + 70,000 = $780,000
Current assets = Accounts receivables + Closing inventory + Bank = 290,000 + 80,000 + 50,000 = $420,000
Total Assets = Fixed assets + Current assets = 780,000 + 420,000 = $1,200,000
Average inventory held = (100,000 + 80,000) / 2 = $90,000

* Next: How to Calculate Equity Ratio
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