1.2.5 Productivity

1.2.5 Productivity

Productivity ratios measure how well a company utilizes its Assets to produce output.   Over the long run, increases in productivity are the most important contributor to economic growth.

The effect of information technology over the last several decades is an important example of productivity increases. As one example, according to Harvard Business Review, between 1987 and 1995, Walmart went from being 40% more productive than its competitors to 48% more productive, despite the fact that all of its competitors were also aggressively increasing their use of IT.  Why? Walmart used information technology to dramatically improve its management of logistics.

Revenue/Total Assets

This ratio, also known as Asset Turnover, measures how effectively a company is using its assets to generate revenue. This is a critical measure of a company’s efficiency or productivity.

Inventory Turnover

INVENTORY TURNOVER
Cost of Goods Sold


Inventory

 

Inventory Turnover measures how many times a company “turns over,” or sells out all of its inventory, in a given year.  The higher the number, the more effectively the company is managing its inventory and selling products.  We can use this turnover number to get another key metric – Days of Inventory.  By dividing the number of days in a year (365) by the Inventory Turnover, we can find the average number of days a piece of inventory is kept inside a company before it is sold.

DAYS INVENTORY
365


Inventory Turnover

Receivables Collection Period

RECEIVABLES COLLECTION PERIOD
365


(Sales/Receivables)

After a company sells its inventory, it needs to get paid for it. The lower this ratio, the faster a company is getting cash from its sales.