Efficiency Ratios

Efficiency ratios measure how productively a company uses its assets to generate revenue. Two companies with the same revenue and the same EBIT margin can have very different asset requirements, one might need ₹100 Cr of assets to generate ₹100 Cr of revenue, while the other needs only ₹50 Cr. The latter is twice as efficient and will generate far higher returns on capital.

In India, efficiency differences within a sector can be dramatic. In the cement industry, some plants convert raw material to despatch in 25 days; others take 45 days. In pharmaceuticals, API manufacturers with complex molecules take months of WIP inventory; generic formulation companies may have much leaner cycles.

Efficiency analysis tells the story of the operational engine behind the financial results. It complements profitability analysis, you need both dimensions (margin and turnover) to understand ROCE.

Asset turnover ratios:

Total Asset Turnover = Revenue ÷ Average Total Assets How much revenue per rupee of assets. Asset-light businesses (IT, consulting) turn assets many times. Capital-heavy businesses (steel, cement) have low turnover.

Fixed Asset Turnover = Revenue ÷ Average Net Fixed Assets Useful for capital-intensive companies. A declining trend suggests assets are ageing and not being replaced, or new capacity isn't generating proportional revenue.

Working capital efficiency (the cash conversion cycle):

• Days Inventory Outstanding (DIO) = (Inventory ÷ COGS) × 365
• Days Sales Outstanding (DSO) = (Trade Receivables ÷ Revenue) × 365
• Days Payable Outstanding (DPO) = (Trade Payables ÷ COGS) × 365
• CCC = DIO + DSO − DPO

Capital Efficiency:

ROIC = NOPAT ÷ Invested Capital (see profitability ratios) Asset Intensity = Invested Capital ÷ Revenue, lower is better for asset-light business models