Efficiency ratios Flashcards
What is the objective of efficiency ratios?
They measure how well a company uses its assets to generate sales.
What is the asset turnover ratio formula?
Revenue / total assets
What is the debtors collection period formula?
(trade receivables / credit sales) x 365 days
What is the creditors settlement period formula?
(trade payables / credit purchases) x 365 days
What is the inventory holding period formula?
(inventory / cost of sales) x 365 days
What is the working capital cycle?
A measure of the time between purchase of inventory (outflow of cash) to sale of inventory (inflow of cash)
What is the working capital cycle formula?
Debtors collection period + Inventory holding period - Creditors settlement period
Which of the efficiency ratios is best kept low?
Inventory holding period is best kept low because it shows the company is more efficient at selling its inventory.
True or false: the debtors collection period should be as short as possible.
True
What is the inventory turnover ratio formula?
Cost of goods sold / average inventory
