Operation Efficiency Ratios

  
 

Operation Efficiency Ratios

Operation Efficiency ratio measure how efficiency the management are utilized the company assets and turn into revenue, inventory management and accounts receivable and accounts payable process and system.

Inventory Turnover

 Inventory turnover measure how fast a company can turn it inventory into finish goods and finally sales and revenue over certain time period.

Inventory turnover = Cost of Goods Sold / Average Inventory(=beginning inventory + end inventory / 2)

Inventory Turnover. <= 1 The turnover seems too low (check the Days of Inventory ratio), perhaps revealing an inadequacy

of inventory to the level of demand.

 

Days of Inventory

 Days of inventory provide how many inventory a company has on hand express in number of day.

Days of inventory = 365 / Inventory Turnover       (replace 90 with 365 for quarterly report)

Days of Inventory

> 100

Holding too much inventory has a cost! Or else it

 may just be due to seasonal variations (eg, high inventory in May ready to go during the peak

season of July).

 

 

Net Working Capital Turnover

 Net working capital turnover measure the ratio of working working capital (= current assets - current liabilities) is used to generate sales or revenue.

Net working capital turnover = Net Sales / Working Capital

 

Asset Utilization

 Asset Utilization = Sales / Total Assets

 

Fixed Asset Turnover

 Fixed asset turnover measures how efficient the management is utilizing the company's fixed assets to generate sales volume.

Fixed asset turnover = Sales / Fixed Assets

Investors are recommended to look at this ratio conjunction with some other factors such as fixed assets depreciation methods could affect this ratio significantly at the same level of sales volume.

Leased assets or company owned assets is another factor that affecting fixed asset turnover calculation. Coverage of Fixed charges ratio should take into consideration under this circumstances to provide better picture to investors.

 

Accounts Receivable Turnover

 Accounts receivable turnover measure how many time of the accounts receivable compare to its sales volume over certain time period. 

Accounts receivable turnover = Sales / Accounts Receivable

The average Accounts Receivable should be taken into account preferably.

 

Average Collection Period

 Average collection period measure average length of time a company receive payment from it customer after close the sale. Investor should compare this ratio with the credit terms the company offer to it customers.

Average collection period = Accounts receivable / (sales / period of accounting statements)

Average collection period <= 30

The credit terms too strict
60 <   

That seems too high, may cause cash flow problems. 

 

 

Accounts Payable Period

 Accounts payable period measure average length of time the company make payment to it suppliers.

Accounts payable period = Accounts payable / (credit purchases / time period over accounting statements)

Using here the Cost of goods sold as an approximation for credit purchases.

  Account Payable period <= 30

The credit terms seem too low.
90 <   

The credit terms seem too high.

 

 

Days of Cash

 Days of cash provide number of days of cash on hand at present sales level.

Days of cash = Cash / (sales / period of time)

30 <  Days of Cash Some of that cash could be invested in

near-cash items to generate a return!

 

 

Productivity

 Productivity measure Sales per Employee.

Productivity = Sales / Number of Employees