Efficiency ratios are financial metrics that measure how well a company utilizes its assets and liabilities to generate sales and profits.

Primary Implication

The more efficient a company is with its resources, the more profitable it will be.  Use the information from your financial statements to confirm how efficient your business actions are through Efficiency Ratios.

Overview

Efficiency Ratios, like Profitability Ratios, measure how well companies utilize their assets to generate income.  They are also called Activity Ratios.  They analyze the time it takes a company to collect cash from its customers or the time it takes to convert inventory into cash—in other words, make sales.

Most often, companies will be more profitable when they are efficient with their resources.  The most common Efficiency Ratios used are the following:

• Accounts Receivable Days
• Accounts Receivable Turnover Ratio
• Working Capital Ratio
• Total Asset Turnover Ratio
• Fixed Asset Turnover Ratio

The above Efficiency Ratios go hand-in-hand with the Profitability Ratios since company profits are derived from efficiently using company resources.