Efficiency Ratio

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DEFINITION of 'Efficiency Ratio'

Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity and the general use of inventory and machinery.

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BREAKING DOWN 'Efficiency Ratio'

Some common ratios are accounts receivable turnover, fixed asset turnover, sales to inventory, sales to net working capital, accounts payable to sales and stock turnover ratio. These ratios are meaningful when compared to peers in the same industry and can identify business that are better managed relative to the others. Also, efficiency ratios are important because an improvement in the ratios usually translate to improved profitability.

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RELATED FAQS
  1. What metrics can be used to evaluate companies in the wholesale sector?

    The largest wholesale distribution industries include motor parts, commercial equipment, electronics, petroleum products, ... Read Full Answer >>
  2. How do I use ratios to perform a financial analysis?

    Ratios are important tools used in fundamental analysis and valuation. Some measure operating performance based on data from ... Read Full Answer >>
  3. What do efficiency ratios measure?

    Efficiency ratios measure a company's ability to use its assets and manage its liabilities effectively. Some efficiency ratios ... Read Full Answer >>
  4. Which financial ratios are considered to be efficiency ratios?

    Efficiency ratios generally measure a company's ability to use its assets and liabilities to generate revenues or profits. ... Read Full Answer >>
  5. Is the bottom line the best representation of a company's financial strength?

    A company's bottom line, also referred to as net income, is an important indicator of operational condition and can be used ... Read Full Answer >>
  6. What are some examples of efficiency ratios used in measuring businesses?

    Efficiency ratios determine how productively a company manages its assets and liabilities to maximize profits. Shareholders ... Read Full Answer >>
  7. What sorts of factors increase cash flow from operating activities?

    Cash flow from operating activities is calculated by adding net income, total non-cash expenses and net change in working ... Read Full Answer >>
  8. What is the difference between efficiency ratios and profitability ratios?

    Efficiency ratios and profitability ratios are tools used in fundamental analysis. These ratios help investors with their ... Read Full Answer >>
  9. Why do shareholders need financial statements?

    Shareholders need financial statements to evaluate their equity investments and help them make informed decisions as to how ... Read Full Answer >>

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