Efficiency ratios measure how productively a company uses its assets to generate revenue. It is also called activity ratios. The key activities of a company involve putting the assets in use to produce goods or services, sell the goods or services, collect the payments, pay off the creditors generate and re-invest into business after payment of dividends etc., The efficiency of these activities is measured by the following ratios:
Mar-19 | Mar-20 | Mar-21 | |
Cost of goods sold | 220 | 210 | 189 |
Inventory | 50 | 46 | 48 |
Average inventory for last two years | 48 | 47 | |
Inventory turnover = 210/48 & 189/47 | 4.37 | 4.03 | |
Industry leader | 4.33 | 3.98 |
Inventory days or days to sell is a ratio derived from the inventory turnover ratio. This ratio indicates the average number of days the company takes to sell the inventory. Fewer days are better as it indicates the demand for goods is high.
Inventory Days = 365 / Inventory Turnover.
Mar-20 | Mar-21 | |
Number of days in a year | 365 | 365 |
Inventory turnover | 4.4 | 4.0 |
Inventory turnover = (a)/(b) | 83.48 | 90.54 |
Industry leader | 84.26 | 91.82 |
Interpretation: The company replaces its inventory 4 times in a year. This is comparable with the industry leader. Also, the number of days it takes to sell the inventory has increased from 83.48 to 90.54 which is comparable with the industry leader
Debtors’ turnover = net sales/average debtors
Mar-19 | Mar-20 | Mar-21 | |
Net sales | 271 | 264 | 228 |
Debtors | 80 | 73 | 71 |
Average debtors for last two years | 77 | 72 | |
Debtors’ turnover = 264/77 & 228/72 | 3.45 | 3.17 | |
Industry leader | 8.38 | 7.61 |
The average collection period indicates the average number of days it takes for a company to collect cash from the debtors. It shows the collection efficiency of the company.
Average collection days = 365 / Receivable Turnover Ratio
Mar-20 | Mar-21 | |
Number of days in a year | 365 | 365 |
Inventory turnover | 3.5 | 3.2 |
Average collection days= (a)/(b) | 105.77 | 115.26 |
Industry leader | 43.56 | 47.98 |
Interpretation: The company has a very low debtor turnover. Only 3 times the debtors are turned around for collection as compared to the industry leader which has a higher rate of turnaround. The collection period is way high as compared to the industry leader. It is bound to have working-capital issues. The collection period has also increased to 115.26 from 105.77
Accounts payable turnover ratio = cost of goods sold for the year / average accounts payable.
Mar-19 | Mar-20 | 44256 | |
Cost of goods sold | 220 | 210 | 189 |
Trade payables | 34 | 31 | 26 |
Average trade payable for last two years | 32 | 28 | |
Payables turnover = 210/32 & 189/28 | 6.49 | 6.70 | |
Industry leader | 10.65 | 8.29 |
Mar-20 | Mar-21 | |
Number of days in a year | 365 | 365 |
Payable’s turnover | 6.5 | 6.7 |
Average payable days= (a)/(b) | 56.22 | 54.50 |
Industry leader | 34.27 | 44.05 |
Interpretation: The company pays its suppliers on an average 6.7 times as compared to the industry leader which pays on an average 8.3 times. The collection turnover is 3 times and the payment is 6.7 times. This means the company pays faster to the creditors than he collects from the debtors. The payable days are also higher. This again is a cause for worry. The company has to improve his collections.
Working capital turnover ratio= Net sales/average working capital
Mar-19 | Mar-20 | Mar-21 | |
Net Sales (a) | 271 | 264 | 228 |
Current assets (b) | 158 | 150 | 144 |
Current liabilities (c) | 52 | 46 | 44 |
Working capital (b)- (c) | 106 | 104 | 100 |
Average working capital for last two years | 105 | 102 | |
Working turnover = 264/105 & 228/102 | 2.51 | 2.24 | |
Industry leader | 3.79 | 3.81 |
Interpretation: The company is able to generate 2.24 times sales out of every rupee of working capital employed as compared to 3.81 times the industry leader. The working turnover has declined in March-21 as compared to 2.51 of March-20.
Asset turnover ratio = net sales/average total assets
Mar-19 | Mar-20 | Mar-21 | |
Net Sales (a) | 271 | 264 | 228 |
Total assets | 203 | 193 | 192 |
Average total assets for last two years | 198 | 193 | |
Asset turnover 264/198 & 228/193 | 1.33 | 1.18 | |
Industry leader | 1.34 | 1.23 |
Interpretation: The company is able to generate 1.18 times sales out of every rupee of assets employed as compared to 1.23 times the industry leader. Its efficiency has fallen as compared to the last year asset turnover of 1.33.
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