Operating performance ratios

Operating performance ratios are intended to measure different aspects of an organization's core operations. The focus of these measurements is on the efficient use of resources to generate sales, as well as how well assets can be converted into cash. A business with excellent performance ratios can generate a high level of sales with relatively few resources, and generates a high level of cash inflows. The essential operating performance measurements are:

  • Fixed asset turnover. This ratio compares revenues to net fixed assets. A high ratio indicates that a business is generating a large amount of sales from a relatively small fixed asset base. The formula is net sales divided by net fixed assets. The ratio can yield false results if a business is using very old assets to generate sales; at some point, those assets must be replaced.
  • Operating cycle. This is the average period of time required for a business to make an initial outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange for the goods. A company with an extremely short operating cycle requires less cash to maintain its operations and so can still grow while selling at relatively small margins. Conversely, a business may have fat margins and yet still require additional financing to grow at even a modest pace, if its operating cycle is unusually long.
  • Sales per employee. This ratio compares revenues to the number of employees. A high ratio indicates that a business is creating a large volume of sales with very few employees. The formula is net sales divided by the number of full time equivalents. The ratio can yield false results if a business is outsourcing a large amount of work or using a large number of contractors.

Related Courses

Business Ratios Guidebook 
The Interpretation of Financial Statements