| Efficiency Ratios |
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| Written by Sunil Tinani | |||||
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Is the company employing its assets
efficiently? Or, are they being underutilized much to the
shareholder's agony? Here is how you can find out:
1. Accounts Receivable Turnover Ratio (ARTR)ARTR = Credit Sales for the year ÷ Accounts Receivables
A healthy figure indicates that the company is efficient in collecting its balances from customers and then pumping the collections back into the manufacturing cycle.
2. Inventory Turnover Ratio (ITR)ITR = Sales ÷ Inventory
A high figure indicates that the company's products are moving fast and the management is efficiently pumping up the sales/volumes – on the flipside, it could indicate that the management is not managing its inventory levels well! A low figure indicates that sales are poor, and should the prices fall the company may get into the red.
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