Answer:
The ratios that reflect whether or not a firm is efficiently using its resources are known as efficiency ratios or activity ratios. These ratios are a measure of how well a company uses its assets and liabilities internally. Efficiency ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity, and the general use of inventory and machinery.
Efficiency ratios include:
1. Inventory Turnover Ratio: This ratio measures how many times a company's inventory is sold and replaced over a certain period. A low turnover implies poor sales and excess inventory, while a high ratio implies strong sales or insufficient inventory.
2. Accounts Receivable Turnover Ratio: This ratio measures how efficiently a firm uses its assets. It is calculated by dividing net credit sales by average accounts receivable during a certain period. A high ratio suggests that the company collects its credit sales quickly, which is a sign of efficiency.
3. Total Asset Turnover Ratio: This ratio measures a company's ability to generate sales from its assets by comparing net sales with average total assets. In other words, it measures how efficiently a company can use its assets to produce sales.
4. Fixed Asset Turnover Ratio: This ratio measures how well a firm uses its fixed assets to generate sales. It is calculated by dividing net sales by net property, plant, and equipment.
5. Days Sales in Inventory (DSI): This ratio shows how many days it takes for a company to turn its inventory into sales. The lower this number is, the better.
6. Days Sales Outstanding (DSO): This ratio shows the average number of days that it takes for a company to collect payment after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money.
7. Payables Turnover Ratio: This ratio shows how quickly a company pays off its suppliers. A low payables turnover ratio can be an indication that the company is delaying payments to its suppliers.
These ratios provide insight into different aspects of a company's operational efficiency, but they should not be viewed in isolation as they may provide misleading information if not considered in context with other financial indicators and industry averages.