Efficiency ratios

Definition

Efficiency ratios measure how well a company utilizes its assets and manages its operations. They are crucial for assessing the overall financial health and operational performance of a business.

5 Must Know Facts For Your Next Test

1. Efficiency ratios include inventory turnover, accounts receivable turnover, and asset turnover.
2. A higher inventory turnover ratio indicates efficient inventory management.
3. Accounts receivable turnover assesses how quickly a company collects cash from credit sales.
4. Asset turnover ratio shows how effectively a company uses its assets to generate revenue.
5. These ratios help investors and managers identify areas needing improvement in operational efficiency.

Review Questions

• What does a high inventory turnover ratio indicate?
• How does the accounts receivable turnover ratio affect cash flow?
• Why is the asset turnover ratio important for evaluating a company's performance?

Related terms

Inventory Turnover Ratio:

Measures how many times a company's inventory is sold and replaced over a period.

Accounts Receivable Turnover Ratio:

Indicates how efficiently a company collects revenue from its credit customers.

Asset Turnover Ratio: Evaluates how effectively a company uses its assets to generate sales revenue.