Efficiency ratios | HL
Keep a Personal Checklist:
What are efficiency ratios?
What is meant by stock turnover?
What are the two ways to calculate the stock turnover ratio?
What is credit control and why is it important?
Explain whether a high or low figure is preferable for:
a) debtor days; b) creditor days.
What is the gearing ratio?
How is capital employed calculated?
Why are highly geared firms generally considered to be risky?
Efficiency Ratios show how well a firm’s resources have been used, such as the amount of time taken by the firm to sell its stock (inventory) or the average number of days taken to collect money from its debtors
Stock (inventory) Turnover Ratio
Stock turnover ratios measures the number of times a firm sells its stocks within a time period, usually one year.
This ratio is particularly common in the retail industry and it looks at how successful a firm is at unitizing their inventory assets.
Who do you think has a higher stock turnover ratio?
Debtor (trade receivables) & Creditor (trade payables) Days Ratio
The debtor days ratio measures the number of days it takes a firm, on average, to collect money from its debtors.
Debtors are the customers who have purchased items on trade credit and therefore owe money to the firm.
The creditor days ratio measures the number of days it takes, on average, for a business to pay its trade creditors.
Gearing Ratio
The gearing ratio is used to assess a firm's long-term liquidity position.
This is done by examining the firm's capital employed that is financed by long-term debt, such as mortgages and debentures
