Question

Which of the following ratios are key components in measuring a company's operating efficiency? (You may select more than one answer.)
a. Profit margin
b. Equity ratio
c. Return on total assets
d. Total asset turnover

Answer 1

The key components in measuring a company's operating efficiency are as follows,

• Option c - Return on total assets

• Option d - Total asset turnover

Explanation:

Efficiency can be defined as a measure to calculate the capability of the business to handle the existing assets and liabilities.

Return on assets (ROA): This measures the efficiency of a company's management in generating earnings from their economic resources or assets.

Total asset turnover: This ratio helps in measuring the ability of the business to generate sales from the existing assets.

In general, the following elements are assumed to be the efficiency ratios:

• Accounts payable turnover

• Accounts receivable turnover

• Inventory turnover

• Fixed assets turnover

The efficiency ratio of a bank is calculated by diving the expenses (without including interest) by revenue. That is,

$\text{Efficiency Ratio }=\frac{\text{ Expenses }}{\text{ Revenue }}$

This is also called as activity ratio.