Lesson aims

• Calculate and interpret the efficiency ratios: stock (inventory) turnover, debtor (trade receivable) days, creditor days and gearing ratio.
• Evaluate possible strategies to improve the above ratios.

Stock turnover ratio

• Measures the number of times, on average, that a firm sells and therefore replenishes its stock, or the rate at which it uses its stock in the case of a manufacturing enterprise, within a given time period, usually a year.
• This is a measure of efficiency in that, depending on the type of business, usually the more frequently stock is 'turned over' the more efficient the firm is in converting the stock into sales and most probably profit.

Strategies to improve the stock turnover ratio

• Lower prices
• Increased promotion
• Stocking only fast-selling items
• Just-in-time stock method
• Better sales forecasting

Debtor days

• Measure of the efficiency with which the firm collects its debts, hence its inclusion as an efficiency ratio.
• Indicates the average number of days it takes the company to collect its debts.

Strategies to improve the debtor days ratio

• More effective credit control

Creditor days

• Indicator of the average number of days it takes the firm to settle its debts.
• It is fairly common to buy goods and services on credit, with a payment period such as 30, 60 or 90 days, depending the amount and the extent to which the supplier trusts that the firm will settle on time.

Strategies to improve the creditor days ratio

• Good relations with suppliers
• Good stock control system