Efficiency Ratios

Efficiency Ratios Definition:

Measure how effective a business is at selling inventory to customers, how quickly it’s able to collect cash back from them and how reliably it pays off its creditors.

Turnover Ratios Definition:

Measures how quickly a business conducts its operations. (Income statement term / balance sheet term)

Inventory Turnover Ratio:

Cost of goods sold / Inventory

Receivables Turnover Ratio:

Revenue / Accounts Receivable

Asset Turnover Ratio:

Revenue / Total Assets

Payables Turnover Ratio:

Cost of goods sold / Accounts Payable

Cash Conversion Cycle Definition:

Tells us the average number of days a business needs to convert it’s investments in inventory into cash.

Cash Conversion Cycle Formula:

Days Sales of Inventory + Days Sales Outstanding + Days Payable Outstanding

Days Sales of Inventory (DSI)

(Inventory / Cost of goods sold) x 365

(Inverted Inventory Turnover Ratio)

Days Sales Outstanding (DSO)

(Accounts receivable / Revenue) x 365

Inverse of Receivables Turnover Ratio

Days Payable Outstanding (DPO)

(Accounts payable / Cost of goods sold) x 365

Inverse of Payables Turnover Ratio