What are Efficiency Ratios?

In order to be profitable, a business must extract the maximum amount of value from the assets it owns. Efficiency ratios are used to measure the managements ability to control the assets of the business and to produce the maximum amount of revenue and profit from them.

Popular Efficiency Ratios List

A selection of popular efficiency ratios from the Double Entry Bookkeeping Ratios Guide.

Efficiency Ratios Analysis

Efficiency ratios should not be viewed in isolation but looked at over a period of time using trend analysis and in comparison to other businesses in your industry.

In addition, in order to give a full picture of what is happening, they should be viewed relative to other ratios calculated for the business such as liquidity ratios, profitability ratios, leverage ratios, activity ratios, and investor ratios.

The ratios show how efficiently the resources of the business are being used to generate revenue so it is preferable for them to be as high as possible. A low efficiency ratio could indicate inefficiencies in the assets themselves or in the management team operating them.

An efficiency ratio will vary from industry to industry, so it is important to make comparisons to similar businesses in your sector. A manufacturing business, for example, would be more capital intensive and therefore all things being equal, have a lower efficiency ratio than for example a retail business.

Efficiency Ratio Formulas

There are numerous examples of efficiency ratios, however, it is important to select the key ratios which relate to your business. The industry sector, size, and complexity of the business will determine the most appropriate ratios to use and many may not be relevant or worth calculating, particularly for a small business.

 

The following list of financial efficiency ratios are a useful start.

Efficiency Ratio Efficiency Ratio Formulas
Fixed Asset Turnover Sales / Fixed Assets
Working Capital Turnover Sales / Working Capital
Asset Turnover Sales / Assets
Last modified July 16th, 2019 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.

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