Which financial ratios are considered to be efficiency ratios?
I consider the efficiency ratios to be the ratios also known as asset turnover ratios, activity ratios, or asset management ratios.
These efficiency ratios include 1) accounts receivable turnover ratio, and the related ratio days’ credit sales in accounts receivable; 2) inventory turnover, and the related ratio days’ cost of sales in inventory; 3) total asset turnover; and 4) fixed asset turnover.
The accounts receivable turnover ratio and the inventory turnover ratio are also used in the context of a firm’s liquidity.
The total asset turnover and fixed asset turnover are indicators of a company’s effectiveness in utilizing its assets.
Learn more about Financial Ratios.
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Account receivable turnover ratio,which one is better higher or lower ratio.is it reciprocal to average collection period or days in sales receivable.
A higher accounts receivable turnover ratio is better than a lower one. The objective is to turn accounts receivable to cash. Therefore the faster or more times per year that a company collects its accounts receivable the better. The average collection period is calculated by this formula: 365 days per year divided by the accounts receivable turnover per year. If the accounts receivable turnover is 10 times per year, the average collection period is 36.5 days (365/10).