Analyzing Financial Efficiency and Performance Ratios

Author: Lynn Fountain

Financial and operational managers use ratio analysis to pinpoint strengths and weaknesses from which strategies and initiatives can be formed. Shareholders may use ratio analysis to measure your company's results against other organizations or make judgments concerning management effectiveness and mission impact.

Important ratio 'groups' that assist in analyzing a business and its viability are efficiency and performance ratios. Performance ratios measure the function of core operations for a company. These ratios reveal information about how efficiently resources are used to generate sales and cash, among other things. Efficiency ratios are used to analyze how well a company uses its assets and liabilities internally.

It is important to understand the calculation requirements of each ratio but equally important is to understand what the results represent in regard to performance and efficiency. This course will cover both concepts.

Ratio analysis is a useful tool that will improve understanding of financial results over time. It provides key indicators of organizational performance. This course focuses on specific efficiency and performance ratios and their use.

Publication Date: November 2022

Designed For
Financial and accounting analysts, internal auditors, compliance analysts, investor analysts and anyone interested in having a better comprehension of a company’s performance.

Topics Covered

• Explore the types and purpose of efficiency ratios
  • Sales and Inventory
  • AR turnover
  • Asset turnover
  • Inventory turnover
• Explore the purpose of performance ratios
• Identify various performance ratios and how to analyze the results
  • Days sales outstanding
  • Cash conversion cycle
  • Days payable outstanding
  • Days inventory outstanding
• Explore profitability ratios
  • NP profit margin
  • Operating profit margin
  • EBITDA margin

Learning Objectives

• Identify the mathematics behind ratios and the importance of understanding the concepts for proper analysis
• Recognize the types and purpose of efficiency ratios
• Describe the purpose of performance ratios
• Identify various performance ratios and how to analyze the results
• Identify the type of ratio that is used to analyze how well a company uses its assets and liabilities internally
• Identify the type of ratio an AR turnover and inventory turnover are examples of
• Identify the appropriate formula for calculating asset turnover
• Identify the type of margin ratio that is useful because it strips-out costs which are not directly related to how efficiently the business generates cash
• Identify the component not needed for purposes of calculating a company's cash conversion cycle

Level
Basic

Instructional Method
Self-Study

NASBA Field of Study
Auditing (2 hours)

Program Prerequisites
None

Advance Preparation
None