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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.