Question

Answer the following questions regarding: Efficiency Ratio

1. Please describe in detail what each of the following ratio attempt to measure?

2. Where would you obtain such information?

3. For what period of time and what other comparisons would assist your analysis.

4. What management policies would have a positive affect on this analysis tool.

Answer 1

1. It measures company's short-term or current performance. In other words it measures the company's ability to use its assets to generate income.

2.we can calculate efficiency ratio by dividing the revenue by the total assets of a company. Both revenue and total assets values can be obtained from the financial statement of the company.

3. An efficiency ratio often looks at aspects of the company, such as the time it takes to collect cash from customers or the amount of time it takes to convert inventory to cash, it makes this ratio important because an improvement in the efficiency ratio usually translates to improved profitability. Some common efficiency ratio are account receivable turnover, fixed asset turnover, sales to inventory, sales to net working capital, account payable to sales and inventory turnover ratio which can assist a manager in his analysis.

4. If efficiency ratios are good then company easily attract investors and investors show their confidence in the company. If efficiency ratios are not good company should frame a suitable policy to improve all efficiency ratios.