A manufacturing company requires efficient use of inventory, equipment, and personnel to develop its products. A company uses the following financial ratios to evaluate its business. These ratios can also be used to gauge the appropriateness of operations and to determine how well the manufacturing process is going. These financial ratios are equally useful to an investor wishing to gain a deeper understanding of a manufacturing company.

The inventory turnover ratio measures the effectiveness of a company’s manufacturing process. This ratio shows how many times a company sells and replaces its inventory over a specific period of time. It is measured by dividing the cost of goods sold by the average balance in inventory.

Maintenance Costs to Total Expenses

A manufacturing company may utilize equipment or machinery during the production process of its goods. A critical measurement of the sustainability of long-term operations is comparing repair and maintenance costs to total expenses.

A low proportion of repair costs signals one of two things. First, a company has in place durable fixed assets that don’t require much ongoing maintenance. Second, a company may elect to simply replace equipment with newer, more reliable heavy machinery. In either case, an investor gains insight regarding management’s long-term strategic planning to implement available technology.

Dividing the total revenue of a manufacturing company by the number of employees generates the revenue earned per employee. An investor uses the calculation to determine the technological efficiency of an entity.

For example, two manufacturing companies each earned $10 million in revenue. However, one manufacturing company has 50 employees, while the other has 20. Assuming they produce similar goods, the company with 50 employees may be operating inefficiently. Alternatively, the company with 20 employees is theoretically employing more efficient technologies with greater capabilities.

Polk & Associates

Large enough to serve a diverse clientele, yet small enough to maintain a hands-on approach, we are committed to maintaining the highest accounting and ethical standards with continuous education, extensive research resources, and excellent quality control.

Polk and Associates is a member of the Michigan Association of Certified Public Accountants, and the American Institute of Certified Public Accountants. The firm participates in the AICPA Peer Review Program, and has always received the highest level of award for its audit practice and quality control.