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2. EFFICIENCY RATIO

- MEASURE HOW EFFECTIVELY THE FIRM IS MANAGING ITS ASSET IN GENERATING SALES.
SHOW US THE FIRM’S EFFICIENCY IN COLLECTING DEBT

Types of ratio Definition Formula Indicator

a. Inventory Ratio indicates how many ↑ The higher
turnover times the stock is sold and the ratio
Unit = 1
ratio replaced in a year faster stock
is being sold

b. Average Ratio indicates the number

collection of days taken by a firm to ↓ The shorter
× 360
period collect its account the ACP, the

receivable faster
Unit = 10
debtor are
paying their

account

c. Fixed Ratios measure the firm’s ↑

assets efficiency in utilizing its
turnover property, plant, and
Unit = 1
equipment in generating
sales

d. Total Ratio indicates is ↑

assets generating a higher
turnover volume sales with the given
Unit = 1
amount of assets