Efficiency Ratios Quiz

Efficiency Ratios

• Asset Turnover Ratio: Formula = Net Sales / Average Total Assets. Indicates income generation efficiency per asset unit.
• Account Receivable Ratio: Formula = Net Credit Sales / Average Account Receivable. Measures payment collection efficiency.
• Account Payable Ratio: Formula = Net Credit Purchase / Average Account Payable. Reflects payment efficiency to suppliers; a higher ratio indicates better payment practices.
• Inventory Turnover Ratio: Formula = Cost Of Goods Sold / Average Inventory. Measures how often inventory is sold and replaced within a period.

Profitability Ratios

• Profitability ratios evaluate a company's ability to generate income relative to revenue.
• They reflect how effectively a company utilizes assets to produce profit and enhance shareholder value.
• Gross Profit Margin: Formula = Gross Profit / Sales Revenue. A high margin indicates strong core business performance.
• Operating Profit Margin: Formula = Operating Profit / Operating Income. Serves as a measure of management efficiency.
• Cash Flow Margin: Formula = Cash Flow / Sales Revenue. Demonstrates capacity to convert sales into cash, aiding in fulfilling supplier payments and asset purchases.
• Return on Equity (ROE): Formula = Net Profit / Shareholder Equity. Indicates expected returns for shareholders; closely monitored by investors.
• Return on Assets (ROA): Formula = Net Profit / Total Assets. Serves as an alternative measure of company profitability compared to current ratio.

Working Capital

• Working Capital: Represents the funds required for daily operations; calculated as current assets minus current liabilities.
• Acts as a measure of short-term financial health and operational efficiency, indicating a company’s capacity to meet immediate expenses.
• Net Working Capital: A positive measure indicating cash flow; important for assessing financial stability and is monitored by banks.

Leverage Ratios

• Measure financial risk by quantifying reliance on debt financing for operations and asset acquisition.
• Leverage Ratio: Formula = Total Debt / EBITDA; indicates how much of the business is financed via debt or equity.
• Debt to Equity Ratio: Formula = Total Debt / Equity. Compares debt levels to shareholders' equity; a high ratio indicates a greater debt burden in financing operations.

Liquidity Ratios

• Assess a company's ability to cover current liabilities with liquid assets.
• Current Ratio: Formula = Current Assets / Current Liabilities. Indicates if there are sufficient current assets to manage current debts.
• Quick Ratio (Acid Test Ratio): Formula = Quick Assets / Current Liabilities. Evaluates liquidity using only liquid assets, excluding inventories.

Financial Statements

• Fundamental components include Profit & Loss Statement, Balance Sheet Statement, and Cash Flow Statement.
• Balance Sheet: Provides a snapshot of a company's financial position at a specific date, showing a balance between assets and liabilities.

Ratio Analysis

• Involves quantitative evaluation of a company's performance over time and against competitors.
• Key ratio categories include Liquidity Ratios, Leverage Ratios, Efficiency Ratios, Profitability Ratios, and Market Value Ratios.

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