- Accounting Topic
- Financial Ratios Topic
Operating Performance Ratios
Summary
Operating performance is defined as measuring results relative to the assets used to achieve those results. Efficiently for the purposes of this presentation could be defined as the ratio of output performed by a process or activity relative to the total required energy spent. This category is subjective in nature. Often measurements are viewed not only in relation to factors within a company but without it as well, which is done by making comparisons of company results to industry standards or benchmarks. Most often, making relative comparisons is the best way to fully understand results in this ratio category. In general this measurement tool is most often applied in a monetary or financial sense, though it also has applications in other areas such as regulatory compliance, ethics, and managing risk.
Understanding operating performance is critical in gauging the condition of a company. Consistently top-performing companies are always efficient operators, while poorly performing companies often have underlying issues which are creating poor results. Results will vary depending on the time period selected, but overtime should provide valuable performance insight.
Fixed Assets Turnover Ratio
The fixed assets turnover ratio measures how efficiently or effectively a company employees its fixed assets to generate sales. Trend analysis is beneficial in making sense of this ratio. Ideally the user would like to see a rising trend which could indicate efficiency or less required investment for a given sales volume. Conversely, a ratio result in a declining trend could indicate overspending or issues on the revenue side. Factors such as book value, age of equipment or, less often, different capital structures or strategic differences in methods of production may make industry comparison difficult.
- Measures relationship between sales and fixed assets
- Generally favorable: higher result
- Measure of: activity and efficiency
- Indicates how well a company utilizes property, plant & equipment to generate revenue
Sales or Revenue per Employee
Sales or revenue per employee uses average employee figures for the reporting period analyzed compared to sales. Ratio results are highly divergent and are driven by industry and strategic management choices. Trend analysis is helpful to gain insight into any operational or efficiency changes, or impacts from changes in strategy within a given company. Peer comparison is particularly important, as business type and size will substantially affect the ratio.
- Indicates revenue generated per employee
- Generally favorable: higher result
- Measure of: activity and efficiency
- Heavily influenced by: industry type, production, and operating strategy
- Best used with: trend analysis
Operating Cycle
The operating cycle is a concept that estimates the average the number of days a company takes to convert