Efficiency Ratios

Price/Sales Ratio: It shows the relation between the sales and the market value of a share. It’s an indicator of the number of times in which the sales corresponding to a share are contained in this price. This then is a ratio that relates the sales of a company with its value on the market, and it also indicates what is the cost of buying a monetary unit for the sales done by the company.

If for example it would be equal to 2, it would mean that the investors would be willing to pay a double equivalency to that of the sales income of the company. If on the contrary it would be inferior to the unit, like for example equal to 0.5, it would signify that the investors are willing to pay 50% of the gross income of the company with the finality of possessing shares of the same.

What this ratio gives us is information to know if the company is sub valuated or over valuated by the market.

Gross margin ratio: it measures the profitability of the sales. Its obtained dividing the difference between the sales and the cost of them, by the sales.

Other ways to valuate efficiency: comparing the expenses foreseen with the real expenses produced. In this sense, a company will be more efficient when obtaining its objective by consuming the minimum expenses as possible. This ratio has to be less or equal to 1. On the other hand, companies that bill their clients by the hour, or other type of similar physical unit, can compare the hours billed with those worked adding to these last the dead hours.

With this ratio you can measure the efficiency of workmanship. It has to be near to the unit.

Beginner Money Investing The Ratio Method Solvency Ratios Efficiency Ratios Profitability Ratios Investment Ratios