This document discusses various efficiency ratios used to assess how successfully a business manages its resources. It defines ratios such as accounts receivable turnover, days' sales outstanding, inventory turnover, inventory turnover in days, operating cycle, and asset turnover. Formulas for calculating each ratio are provided along with examples using figures from sample income statements and balance sheets. The ratios are used to measure elements like average time to collect payments, inventory holding periods, cash flow cycles, and efficiency of asset usage.

1. Finance &
Investment
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PRESENTED BY
Dr. Ramadan Babers
https://www.linkedin.com/in/ramadan-babers-phd-78976345/
Part_06

2. 2
1
• Efficiency Ratios: Introduction
2
• Efficiency Ratios
3
• Balance Sheet / Income Statement / Useful Info.
4
• Ratios
Efficiency Ratios

3. 3Efficiency Ratios: Introduction
used to try to assess how successfully
the various resources of the business are
managed
The following ratios examine some of
the more important aspects of resource
management:
• Average settlement period for trade receivables
• Average inventories turnover period
• Average settlement period for trade payables
• Sales revenue to capital employed

4. 4
1- Accounts Receivable Turnover
3- Inventory Turnover
Efficiency Ratios
2- No. of Days’ Sales in Accounts Receivable / (Days Sales Outstanding DSO)
4- Inventory Turnover in Days
5- Operating Cycle
6- Assets Turnover

5. 5Example: Balance Sheet

6. 6Example: Income Statement
Gross margin = net sales – cost of goods sold
= 450000 – 127000 = 323000
Net operating income = gross margin –
operating expenses
= 323000 – 249000 = 74000
Net income before taxes = net operating
income – interest expense
= 74000 – 8000 = 66000
Net income = net income before taxes – less
income taxes
= 66000 – 19800 = 46200

7. 7Example: useful information

8. 8
It measures how many times a business can turn its accounts
receivable into cash during a period (each year).
Account Receivable Turnover =
Sales on Account
Average Account Receivable
Account Receivable Turnover =
$ 494000
$ 17000+$ 20000 ÷2
= 26.70 𝑡𝑖𝑚𝑒𝑠
1- Accounts Receivable Turnover
In other words, it measures how many times a business can collect its
average accounts receivable during the year.

9. 9
It measures The average settlement period for trade receivables ratio
calculates how long, on average, credit customers take to pay the
amounts owing
Days’ Sales in Accounts Receivable =
365 Days
Account Receivable Turnover
Days’ Sales in Accounts Receivable =
365 𝐷𝑎𝑦𝑠
26.70 𝑇𝑖𝑚𝑒𝑠
= 13.67 𝑑𝑎𝑦𝑠
2- No. of Days’ Sales in Accounts Receivable
/ (Days Sales Outstanding DSO)
In other words, it measures, on average, how many days it takes to
collect an account receivable.

10. 10
• A business will normally prefer a
shorter average settlement period to
a longer one as, once again, funds
are tied up that may be used for
more profitable purposes
• Furthermore, the shorter the
settlement period, the better will be
the business’s cash flow
2- No. of Days’ Sales in Accounts Receivable
/ (Days Sales Outstanding DSO) --- (cont.)

11. 11
3- Inventory Turnover
Inventory Turnover =
Cost of Goods Sold
Average Inventory
Inventory Turnover =
$ 140000
$ 10000+$ 12000 ÷2
= 12.72 𝑡𝑖𝑚𝑒𝑠
A ratio showing how many times a company has sold and replaced
inventory during a given period / year

12. 12
4- Inventory Turnover in Days
This ratio indicates the average no. of days required to sell inventory
Inventory Turnover in Days =
365 Days
Inventory Turnover
Inventory Turnover in Days =
365 𝐷𝑎𝑦𝑠
12.72
= 28.69 𝑑𝑎𝑦𝑠

13. 13
4- Inventory Turnover in Days (cont.)
• A business will normally prefer a short
inventories turnover period to a long one,
because holding inventories incurs costs,
such as the opportunity cost of the funds
• When judging the amount of inventories to
carry, the business must consider such
things as likely sales demand, the possibility
of supply shortages, the likelihood of price
rises, the storage space available and their
perishability and/or susceptibility to
obsolescence

14. 14
5- Operating Cycle
It is the average period of time required for a business to make an
initial outlay of cash eviecer dna ,sdoog eht lles ,sdoog ecudorp ot
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Operating Cycle = Account Receivable Turnover in Days
+ Inventory Turnover in Days
Operating Cycle = 13.67 + 28.69 = 42.36 days
Operating cycle indicates the number of days between acquisition of
inventory and realization of cash from selling the inventory

15. 15
6- Assets Turnover
The asset turnover ratio measures the value of a company's sales or
revenues relative to the value of its assets
This ratio can be used as an indicator of the efficiency with which a
company is using its assets to generate revenue
Assets Turnover =
Net Sales
Total Assets
Assets Turnover =
$ 494000
346390
= 1.43 𝑡𝑖𝑚𝑒𝑠

16. 16
6- Assets Turnover
• The higher the asset turnover
ratio, the more efficient a
company
• Conversely, if a company has a
low asset turnover ratio, it
indicates it is not efficiently
using its assets to generate sales

17. End
Q & A
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