Efficiency Ratio

AAA

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.

INVESTOPEDIA EXPLAINS '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.

VIDEO

Loading the player...
RELATED TERMS
  1. Net Operating Income - NOI

    A company's operating income after operating expenses are deducted, ...
  2. Expense

    1. The economic costs that a business incurs through its operations ...
  3. Net Income - NI

    1. A company's total earnings (or profit). Net income is calculated ...
  4. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
  5. Operating Expense

    A category of expenditure that a business incurs as a result ...
  6. Overhead

    An accounting term that refers to all ongoing business expenses ...
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 >>
Related Articles
  1. Fundamental Analysis

    Efficiency Ratio

    There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
  2. Insurance

    Working Capital Works

    A company's efficiency, financial strength and cash-flow health show in its management of working capital.
  3. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  4. Fundamental Analysis

    Spotting Profitability With ROCE

    This straightforward ratio measures whether a company is efficient, money-making or neither.
  5. Fundamental Analysis

    Understanding Consolidated Financial Statements

    Consolidated financial statements are the combined financial statements of a parent company and its subsidiaries.
  6. Fundamental Analysis

    Explaining the Common Size Income Statement

    A common size income statement expresses each account as a percentage of net sales.
  7. Economics

    Understanding Historical Cost

    Historical cost equals the original purchase price of an asset recorded on a company’s balance sheet.
  8. Economics

    What's Recorded in a Cash Book?

    A cash book is an accounting book that records all cash receipts and cash payments before they’re recorded in a business’s general ledger.
  9. Economics

    Explaining Capital Reserve

    Capital reserve is an account on a company’s or municipality’s balance sheet that is dedicated to money reserved for long-term or large-scale projects.
  10. Economics

    Understanding Capital Investment

    Capital investment is a term that describes a company’s expenditures for long-term assets used in the operation of its business.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!