How to Calculate the Efficiency Ratio for a Property

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Efficiency ratios help property owners ascertain the productive utilization of their assets.
Efficiency ratios help property owners ascertain the productive utilization of their assets. (Image: Hemera Technologies/AbleStock.com/Getty Images)

Efficiency ratios, also known as asset management ratios, assess how well a firm utilizes the available assets to generate revenue and sustain itself. This includes a set of ratios that analyze items such as average collection period, turnover of inventory, fixed assets and total assets, according to financial analyst Harold Kent Baker in his book "Financial Management." In a commercial real estate environment, these ratios analyze the behaviors of rent collection, days of vacancy and number of properties available or leased.

Calculate rent receivables. Divide the net rents by the accounts receivable. Generally, a high accounts receivable turnover reflects a restrictive credit policy or limited number of days to pay, which is consistent with rental settings.

Determine average collection period. Divide 365 days of the year by the rent receivables turnover. If the collection period is within the stated policy, things are proceeding well; otherwise, there may be a need to address collection recovery.

Assess inventory turns. Divide the cost of goods sold by the inventory.

Estimate the total assets turnover. Measure the management’s efficiency in managing total asset to generate sales by dividing net sales by total assets.

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References

  • “Financial Management”; Harold Kent Baker; 1997
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