This calculator provides the user with five of the most useful efficiency ratios. Using information from the income statement and balance sheet, this calculator determines the cash, inventory, accounts receivable and accounts payable turnover along with the cash conversion cycle.
The variables used in our online calculator are defined in detail below, including how to interpret the results.
This calculator requires a total of six inputs, two of which are derived from the company's income statement.
Revenue is a financial term used to account for the money that a company receives from activities such as sales of products and / or services to customers. In this example, include all of the income derived from the company's core business operations each year.
Also known as cost of sales, the cost of goods sold, or COGS, is the direct expense a company incurs when making a product, or supplying a service, such as raw materials and labor.
The next three inputs are current assets, which can be found on the company's balance sheet.
The most liquid of all the current assets, this includes currency, and deposit accounts at banks and other financial institutions.
This is money owed to the company by its customers, but not yet paid.
These are assets held in stock, which are to be sold to customers as part of normal business operations.
This last input is a current liability. Once again, this detail is found on the company's balance sheet.
This is the value of the goods and services purchased by the company, but not yet paid to vendors and trade partners.
The value for cash turnover is found by dividing revenues by cash and cash equivalents. This tells the analyst how many times a company replenishes cash with revenues. Generally, a high cash turnover ratio is better than a low one.
This next ratio is found by dividing cost of goods sold by average inventory. Inventory turnover provides insights into the company's ability to efficiently manage inventory. Typically, higher values of this measure are a positive sign.
This metric tells the analyst how well a company manages the credit they're extending to customers. Accounts receivable turnover is found by dividing revenues by average accounts receivable. If all sales were on credit (a simplifying assumption), and customers repaid balances owed in 30 days, then this ratio would be around 12.
While it's desirable for companies to be paid quickly by customers, it's also desirable to delay payments to suppliers and trade partners. The accounts payable turnover rate measures how long it takes to pay these suppliers.
This last metric tells the analyst how much cash is tied up in inventory, its ability to collect money owed by customers, as well as payments made to creditors. The cash conversion cycle adds days sales outstanding (DSO) to days inventory outstanding (DIO) and subtracts days payable outstanding (DPO). As is the case with most financial ratios, it's important to use an industry benchmark to determine a company's relative performance.
Efficiency Ratios Calculator - Copyright © 2012 - 2015 Money-Zine.com (Last Reviewed on January 30, 2015)
Disclaimer: These online calculators are made available and meant to be used as a screening tool for the investor. The accuracy of these calculations is not guaranteed nor is its applicability to your individual circumstances. You should always obtain personal advice from qualified professionals.