PREPARATION, OBJECTIVES:

ANALYSIS AND 1. I Can identify what is efficiency

ratios
INTERPRETATION OF 2. I can solve different efficiency
ratios
FINANCIAL STATEMENT 3. I can analyze and interpret
efficiency ratios

PART 4

LIFECOLLEGE
MOLDING CHAMPIONS
 EFFICIENCY RATIOS

Efficiency ratios are

metrics that are used in
analyzing a company’s ability
to effectively employ its
resources, such as capital
and assets, to produce
income. The ratios serve as a
comparison of expenses
made to revenues generated,
essentially reflecting what
kind of return in revenue or
profit a company can make
from the amount it spends to
operate its business.
 EFFICIENCY RATIOS

Inventory Turnover 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

Ratio 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

EFFICIENCY
Accounts Receivable 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
Turnover Ratio 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

Accounts Payable 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠

Turnover Ratio 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
Asset Turnover Ratio 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Days’ Sale in 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
Inventory
 EFFICIENCY RATIOS:
Accounts Payable Turnover Ratio

Accounts Payable 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠

Turnover Ratio 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒
EFFICIENCY
are short-term debt that a company owes to its suppliers and creditors. The accounts
payable turnover ratio shows how efficient a company is at paying its suppliers and short-
term debts.

Average Accounts Payable = (Beginning Accounts Payable + Ending Accounts Payable) / 2

Example:
Company A reported annual purchases on credit of P123,555 and returns of P10,000 during the year
ended December 31, 2017. Accounts payable at the beginning and end of the year were P12,555 and
P25,121, respectively. The company wants to measure how many times it paid its creditors over the fiscal
year.
𝑃123,555 −𝑃10,000
= 6.03
𝑃12,555+𝑃25,121 /2 Interpretation:
Therefore, over the fiscal year, the company’s accounts payable
turned over approximately 6.03 times during the year. The turnover
ratio would likely be rounded off and simply stated as 6.

ACCOUUNT PAYABLE TURNOVER IN DAYS
Payable Turnover in Days = 365 / Payable Turnover Ratio
Determining the Accounts Payable Turnover in Days for
Company A in the example above
Payable Turnover in Days = 365 / 6.03
Interpretation:
Therefore, over the fiscal year, the company takes
approximately 60.53 days to pay its supplier.
EFFICIENCY RATIOS:
Accounts Payable Turnover Ratio
Importance of your Accounts Payable Turnover
Ratio
Executive management should pay close attention to
the company’s accounts payable turnover ratio.
Investors and any suppliers poised to extend credit
will look at it closely. It can have an impact on cost of
goods sold, as suppliers may use that ratio to
determine financing terms—and that can affect the
bottom line.
 EFFICIENCY RATIOS:
Assets Turnover Ratio

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
Asset Turnover Ratio 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
EFFICIENCY
measures the efficiency with which a company uses its assets to produce sales. The asset turnover ratio
formula is equal to net sales divided by the total or average assets of a company. A company with a high
asset turnover ratio operates more efficiently as compared to competitors with a lower ratio.

•Net sales are the amount of revenue generated after deducting sales returns, sales
discounts, and sales allowances.
•Average total assets are the average of aggregate assets at year end of the current or
preceding fiscal year. Note: an analyst may use either average or end-of-period assets.

Example:
Company A reported beginning total assets of P199,500 and ending total assets of P199,203. Over the
same period, the company generated sales of P325,300 with sales returns of P15,000.
𝑃1325,300−𝑃15,000 Interpretation:
= 1.5565 Therefore, for every peso in total assets, a company generated
(𝑃199,500 −𝑃199,203)/2
P1.5565 in sales.
 EFFICIENCY RATIOS:
Assets Turnover Ratio

Interpretation of the Asset Turnover Ratio

The ratio measures the efficiency of how well a company uses assets to produce sales. A higher ratio is
favorable, as it indicates a more efficient use of assets. Conversely, a lower ratio indicates the company is
not using its assets as efficiently. This might be due to excess production capacity, poor collection
methods, or poor inventory management.

The benchmark asset turnover ratio can vary greatly depending on the industry. Industries with low profit
margins tend to generate a higher ratio and capital-intensive industries tend to report a lower ratio.
 EFFICIENCY RATIOS:
Days’ Sale in Inventory

Days’ Sale in 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

x 365 days
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
Inventory
EFFICIENCY
is a measurement of the average number of days or time required for a business to
convert its inventory into sales. In addition, goods that are considered a “work in
progress” (WIP) are included in the inventory for calculation purposes.

The DSI figure represents the

average number of days that a
company’s inventory assets are
realized into sales within the year.
Days sales in inventory is also one
of the measures used to determine
the cash conversion cycle, which is
the company’s average days to
convert resources into cash flows.
Example:
For the year-end 2015 financial statements, Target Corp.
reported an ending inventory of P1M and a cost of sales of
P100M. Given the figures, the DSI for the year is 3.65 days,
meaning it takes approximately 4 days for the company to sell
its stock of inventory.

IMPORTANCE OF DAYS SALES INVENTORY TO BUSINESS AND INVESTORS
For a company that sells more
goods than services, days sales
in inventory is an important
indicator for creditors and
investors, because it shows
the liquidity of a business. The
interested parties would want
to know if a business’s sales
performance is outstanding;
therefore, through this
measurement, they can easily
identify such.
The more liquid the business is,
the higher the cash flows and
returns will be. Management is
also interested in the
company’s days sales in
inventory to determine how
fast inventory moves, which is
important when taking storage
and maintenance expenses of
holding inventory into account.
EFFICIENCY RATIOS:
Days’ Sale in Inventory
The carrying cost of inventory,
which includes, rent, insurance,
storage costs, and other
expenses related to holding
inventory, may directly impact
profit margin if not managed
properly. In addition, the
longer the inventory is kept,
the longer its cash
equivalent isn’t able to be used
for other operations and, thus,
opportunity cost is lost.
 Work on your worksheet at GENYO
ABM-BF-G12/Q2-W3: LESSON 3-PART 4
 REFERENCES

https://corporatefinanceinstitute.com/resources/knowledge/finance/efficiency-ratios
https://www.netsuite.com/portal/resource/articles/accounting/accounts-payable-turnover-ratio.shtml
https://corporatefinanceinstitute.com/resources/knowledge/modeling/days-sales-in-inventory/

IMAGE RESOURCES

https://courses.lumenlearning.com/wm-financialaccounting/chapter/introduction-to-operating-efficiency-
measures/