Efficiency ratios are the measure of the degree of the efficiency of a business. Each business runs while utilizing its assets and managing its liabilities. Efficiency ratios of a business are calculated to show how well a business is using its assets and how efficiently it is managing its liabilities. There are a number of efficiency ratios and a few of them are listed below:-
- Inventory Turn Over Ratio
- Accounts Receivable Turnover Ratio
- Accounts Payable Turnover Ratio
- Total Asset Turn Over Ratio
Inventory turnover ratio is the measure of the degree of efficiency with which inventory of a business is converted into sales. A company with a low inventory turnover ratio depicts that it is using its inventory efficiently and routinely converting inventory into sales on the other hand a high value of this ratio shows that company is suffering from a difficulty in selling products as a result inventory is overstocked.
Account receivable turnover ratio indicates how efficiently a company gathers its receivable accounts. This also shows the degree of efficiency of a company of managing its credit. The high value shows that company is unable to collect its accounts receivable in an efficient manner.
Accounts payable ratio indicates how efficiently a company is paying its outgoing accounts. The accounts payable ratio indicates how effectively a company is managing its liabilities. In the same way the total asset turnover ratio shows how effectively a company is using its long term and short term assets to generate profit.