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Efficiency Ratio

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An organisation needs to utilise its assets efficiently in order to generate more income.

Efficiency ratios will answer the question:  Does the business use its assets/investments efficiently? 

Two main efficiency ratios include the total asset turnover ratio and the fixed asset turnover ratio. 

Total Asset Turnover

Total Asset Turnover = Sales (Total Assets)

How to interpret this ratio: The bigger the ratio, the more efficient the utilisation of total assets.

Fixed Asset Turnover

Fixed Asset Turnover = Sales (Fixed Assets)

How to interpret this ratio: Fixed assets such as equipment or property require a large investment and it is important that the sales justify this investment. The bigger the ratio, the more efficient the utilisation of fixed assets.