Efficiency indicator types:
- Inventory turnover
- Trade receivables turnover
- Trade payables turnover
- Other industry-specific indicators
Inventory turnover shows how many times the firm has sold out its inventory in a given period. The nature of the industry should be considered during the assessment of the value, because a large inventory turnover may arise from a relatively small size of average inventory. Thus, bigger turnover does not necessarily mean better performance in every case. It is calculated as sales divided by average inventory of the period.
Trade receivables turnover
This ratio shows how efficiently the firm collects its receivables from its customers. More precisely, the number of times the business has received its average accounts receivable in a given period. A high number means that the firm can effectively collect the receivables and the customers pay their debts frequently, indicating a large bargaining power towards the customers. It is the fraction of the sales and the average accounts receivable of the period examined.
Trade payables turnover
With the help of trade payables turnover, the payment practices of the firm towards its suppliers is assessed. It shows how many times in the assessed period the firm has paid its debts to the suppliers. The firm has effective policies if the trade receivables turnover is large and the trade payables turnover is small. This combination indicates that the customers of the firm pay their debts rapidly and the money is not transferred to the suppliers right away. In this case the firm has significant bargaining power towards the participant firms in both the input and output markets. Accounts payable turnover is the ratio of the cost of goods sold (COGS) and the average accounts payable of the period.
Other industry-specific indicators
These are special indicators with industry-specific meaning (e.g. average revenue per customer or revenue per square meter in the retail sector).