Efficiency ratios
How quickly does the business sell inventory, collect from customers and pay its suppliers? Efficiency ratios measure how hard assets and working capital are working.
- Asset turnoverRatio
Revenue ÷ Average total assets - Inventory turnoverRatio
Cost of goods sold ÷ Average inventory - Days sales outstanding DSORatio
Average accounts receivable ÷ Net credit sales × Days in period - Days payable outstanding DPORatio
Average accounts payable ÷ Cost of goods sold × Days in period - Cash conversion cycle CCCRatio
Days inventory outstanding + Days sales outstanding − Days payable outstanding
Reading efficiency ratios together
Efficiency ratios measure how hard assets and working capital are working. Turnover ratios divide a flow, such as revenue or the cost of goods sold, by an average balance, and show how many times the balance is used during a period. Days ratios turn the same comparison into a number of days: how long stock is held, how long customers take to pay and how long the business takes to pay its suppliers.
The three days ratios combine into the cash conversion cycle, which estimates how long cash is tied up between paying for stock and collecting from customers. Use averages of opening and closing balances where you can, and keep the number of days in the period consistent, since a 360-day year gives slightly different results from a 365-day year.
Financial statement map
Choose a line item to see which ratios use it, or choose a ratio to see its line items and the calculation.
Illustrative example company, not actual results. Balance sheet ratios use year-end balances.
Balance sheet (end of year)
Assets
Liabilities and equity
Income statement (year)
Ratios
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Line items and the ratios that use them (text view)
- Revenue
- Asset turnover (numerator)
- Total assets
- Asset turnover (denominator)
- Cost of goods sold
- Inventory turnover (numerator), Days payable outstanding
- Inventory
- Inventory turnover (denominator)
- Accounts payable
- Days payable outstanding
- Days in period
- Days payable outstanding