![]() ![]() These ratios give investors insights into how well a company uses its resources to generate revenue. To conclude, efficiency ratios are essential for investors to analyse a company's overall efficiency. While analysing stocks, it is important to compare a company's accounts receivable turnover ratio to its peers in the same industry. On the flip side, a lower ratio could suggest that the company is having trouble collecting payments, which could lead to cash flow problems. We simply divide the net credit sales by the average accounts receivable to calculate this ratio.Ī higher ratio indicates that a company is able to collect payments more quickly, which is a good sign. Moreover, this ratio measures the frequency with which a company collects its average accounts receivable balance over a specific period. It measures how well a company is collecting payments from its clients. That's where the accounts receivable ratio comes in. ![]() If these clients don't pay on time, it could lead to cash flow problems. Have you ever had a friend who borrowed money from you but took ages to pay you back? Similarly, businesses have to deal with many clients who take goods on credit. So, when analysing stocks from a particular sector, you need to compare the asset turnover ratio with its peers for better analysis. In comparison, a lower ratio indicates that it may not be using its assets efficiently. Generally, the asset turnover ratio of retail businesses is higher because they have small asset bases but high sales volumes.Ī higher ratio signifies that the company is using its assets well to generate higher revenue. In the business world, this efficiency is measured by the asset turnover ratio, which is calculated by dividing the sales achieved by the company by the assets (Net sales/ Average total assets).īy analysing this ratio, investors can understand how well a company uses its assets to generate profits.įor example, if we look at the retail sector, the asset turnover ratio of Trent is 1.04, whereas Vedant Fashion has a ratio of 0.69 (both as of 3rd May 2023). This is an excellent example of how a tea seller uses his assets efficiently (the tea powder) to the optimum level to sell more tea and generate higher revenue. Have you ever noticed a tea seller using a cloth to strain the tea before serving it? By doing this, he ensures that the tea powder does not flow into your cup, and he can reuse the same tea powder to make more cups of tea. Also, instead of doing a single-period exercise, it is great to look at a five-year trend and the reasons behind any odd movement in the ratio. When analysing a company's inventory turnover ratio, it's crucial to compare it with its peers in the same industry. In this case, Nestle India is more efficient than Britannia Industries, indicating higher efficiency.Ī high inventory turnover ratio is often viewed as a positive sign for a company, indicating strong product demand and efficient inventory management. Whereas Nestle India has an inventory turnover ratio of 23.11 (as of 3rd May 2023), meaning that they sell their entire inventory 23.11 times a year. The formula to calculate the inventory turnover ratio is dividing the Cost of Goods Sold (COGS) by the average inventory.įor example, Britannia Industries has an inventory turnover ratio of 15.4 (as of 3rd May 2023), meaning they sell their entire inventory 15.4 times a year. The inventory turnover ratio tells us how many times a company sells all its inventory or restocks its inventory in a given year. The longer a company takes to sell its inventory, the lower its inventory turnover ratio will be, which means low efficiency. No business wants to manufacture goods to store them in their godown.Įvery company expects to sell its products as quickly as possible to earn profits from the sale. ![]() ![]() A company is highly efficient if it manages to sell its manufactured inventory on time. ![]()
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