Efficiency Ratios

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Efficiency Ratios
The efficiency ratio is an indicator of how well Johnson and Johnson (J&J) is run on an organizational wide basis. Efficiency ratios are also defined as asset turnover ratios (Finkler, Kovner & Jones, 2007). The asset turnover ratio measures how productive J&J is in managing all of its assets to generate Sales. This efficiency ratio is calculated by dividing sales by total assets by total revenue. For year 2010, J&J had an asset turnover of 0.6. Comparing J&J’s asset ratio to the industry, it is the same (Key Financial Ratios: Financial Results - Johnson & Johnson, 2011). Thus J&J is as efficient in the use of its assets as its healthcare competitors in the industry. Revenue to assets = Total revenueTotal assets Total revenue $61,587.0= 0.598 or 0.6 Asset turnover Total assets $102,908.0| The days' receivables ratio is calculated by dividing the accounts receivable by the revenue per day. The days' receivables will indicate how long, on average, it takes for J&J to collect on its sales to customers on credit. This ratio is also known as the average collection period (ACP). The shorter the collection period, the sooner the organization can pay bills or invest to earn interest (Finkler, Kovner & Jones, 2007). A short ACP is more efficient for the organization. J&J had an ACP of 58 days in 2010. This is a slight increase from previous year’s ACP of 57 days. Revenue per day = Total revenue 365$61,857.0 = $168.731 365 days Day’s receivable = Accounts receivable Revenue per day AR $9774.0 = 57.92 days DR $168.731/day|

Reference

Key financial ratios: financial results - johnson & johnson . (2011). Retrieved from http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=ManagementEfficiency&symbol=JNJ
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