Today we will look at the "Efficiency Ratios" section of the Ratio Analyzer report.  These items are related to the company's ability to collect what it is owed (receivables) and how it manages its inventory. 

The first item in this section is Accounts Receivable, or rather the annualized change that is obtained by comparing the current (end of the quarter) value to the Accounts Receivable a year ago.  This is computed as a percentage:

      Accounts Receivable Change = 100*( ((Accounts Receivable Current)/(Accounts Receivable a year ago)) - 1 )

A company should collect what it is owed in a prompt manner, consistent with the policies and agreements it has with its customers.  Ideally, cash should be paid on delivery.  In practice, companies offer terms such as payment within 15, 30, or 90 days, etc.

We would like to see Accounts Receivable continually decrease, but we should also recognize that Accounts Receivable will be tied to sales.  The more that sales increase, the more the company needs to collect.  Large increases in Accounts Receivable that aren't tied to increasing sales could indicate a problem.

The next two items are: Days waiting for payment (current) and Days waiting for payment (yr. ago).  These number tell us how long it takes the company to collect what it is owed, and whether this is changing or not.  Our analysis includes the benchmark number of 60 days: bills should be collected in less than 60 days.  If not there could be a problem.

The fourth item in the Efficiency section is the Sales to Inventories Comparison.  More specifically, we compare the annualized Sales Growth Rate (this is in the Profitability Ratios section) with the annualized change in Inventories. You will note that this isn't actually a number.  Instead, we compare the growth rates and offer commentary. 

Sales and Inventories are linked because you can't increase sales without manufacturing more "stuff."  The more "stuff" you manufacture, the more you need to sell it, or it will pile up in the warehouse.  When inventories increase at a greater rate than sales, you need to sell it or you need to slow down production.  Conversely, if sales are growing you need to increase production. 

Sometimes companies will increase production (and inventories) in anticipation of future sales.  If they do that, they need to deliver on the sales.
What we look for in this comparison is that inventories should not increase faster than sales.

So, the next item to consider is the annualized Inventory Growth Rate expressed as a percentage:

         Inventories Change = 100*( ((Inventories Current)/(Inventories a year ago)) - 1 )

And, as we noted above, growth in inventory is acceptable if it is similar to the growth in sales. 


Inventory Turnover Days is the number of days that inventories sit on the shelf waiting to be sold.  We'd like this number  to be small.  The best way to evaluate Inventory Turnover days is to compare companies in the same industry.  Here, a value greater than 60 may be a cause for caution.

The Sales to Accounts Receivable Comparison is similar to the comparison of Sales to Inventories.  We compare the annualized changes, and we look for sales that grow faster than accounts receivable.

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For fun, let's look again at Microsoft and Airgas. 

Microsoft's Accounts Receivables are increasing on a year to year basis.  If you look back several years or quarters, this is a continuing trend, and it is probably related to the fact that sales are also increasing.  Since sales are also growing (sneak a peak at the Profitability Ratios section), and sales are growing faster than accounts receivable, we can probably ignore this.

The number of days that Microsoft needs to collect its Accounts Receivable is also growing, and this also appears to be a trend.  As the company grows and as sales grow, it appears that Microsoft is less efficient now than in the past in collecting those outstanding bills.

Airgas, on the other hand, seems to be pretty good at collecting its bills, but Accounts Receivables are growing, and at a rate that exceeds the growth in sales. Inventories are also increasing at a rate faster than sales are increasing.  These are items that ought to be checked out.