Ratio Analysis
Financial Ratio Analysis cannot be used in a vacuum. It must be interpreted with the help of other outside information; specifically benchmarks on which to evaluate the results. Often a company’s financial ratios are benchmarked against ratios of peers and competitors; industry averages; and/or its own historical ratios. Even these comparisons need to be evaluated in the context of the company’s strategy, operational plan, and current economic conditions; all of which can alter the ratios.

Operating Efficiency Ratios (Activity Ratios, Utilization Ratios)
The Operating Efficiency Ratios are used to measure how well the management of a company performs certain activities and how well it utilizes its assets. These ratios are a tool used to evaluate how well management efficiently uses working capital and long-term assets.
Inventory Turnover (ITO)
The Inventory Turnover Ratio shows how many times inventory is sold and replaced in a given accounting period. It is used to indicate inventory management effectiveness, with the higher the inventory turnover ratio, the shorter time the inventory was held by the company.
ITO=COGSAverage Inventory
Days Inventory on Hand (DOH)
The Inventory days on Hand ratio shows the average age of the inventory, or how long it has been held by the company. The Days on Hand ratio will move in an inverse direction to the Inventory Turnover Ratio; as Inventory Turnover goes up, the length of time the inventory is held goes down.
DOH=Days in PeriodITO
Receivables Turnover (RTO)
The Receivables Turnover Ratio shows how much sales were created from a given level of receivables within an accounting period. This ratio is used to evaluate the credit policies of a company and how much benefit in increased revenue a company is experiencing for extending credit to customers.
RTO=Credit SalesAverage Receivables
Days Sales