Question

What ratios would you use to evaluate management performance?

Answer 1

Following are the ratios that can be used to evaluate management performance -

1. Return on Equity - This ratio evaluates the income earned by the company from investing owner's fund into the business. (ROE = Net Income/ Average Shareholder Fund)*100.

2. Return on Assets- This Ratio evaluates the income earned by the company from investing both equity and debt/borrowings into the business. (ROA= Annual Net Income/ Total Assets)*100

3. Return on Investment - This ratio provides insight into the return earned from investment made by the company. Management plays a vital role in making investment decisions. This ratio evaluates managements' investment decisions.

4. Current Ratio - Current ratio is simply Current Assets over the Current Liabilities of the company. Current Ratio= Current Assets/ Current Liabilities).

5. Inventory Turnover Ratio - Cost of Good sold/ Average Inventory. This ratio states that the sales of the company is good and how many time company sold its average inventory.

6. Asset Turnover Ratio - (Formula - Sales/ Average Total Assets) - This ratio evaluates the management efficiency to generate sales from its Assets.

7. Receivable Turnover Ratio -(Formula- Credit Sales/ Average Accounts Receivable). This ratio evaluates management efficiency in recovering amount from customers against credit sales made to them.

8. Payable Turnover Ratio -  (Formula- Credit Purchases/ Average Accounts Payable). This ratio evaluates management efficiency in managing its creditors.