3.6 Efficiency Ratio Analysis

Assessment Objectives
Further efficiency ratios: Inventory/stock turnover Debtor days Creditor days Gearing ratio	AO2, AO4
Possible strategies to improve the above ratios	AO3

Efficiency Ratios (HL only)

$Stock\,turnover\,(number\,of\, times) = {cost\,of\,goods\,sold\over average\,stock\,}$

or

$Stock\,turnover\,(number\,of\,days) = {average\,stock\over cost\,of\,goods\,sold\,}\times365$

where costs of goods sold is an approximation of total credit purchases

$and\,average\,stock = {opening\,stock\,+\,closing\,stock\over 2\,}$

$Debtor\,days\,ratio\,(number\,of\,days) = {debtors\over total\,sales\,revenue\,}\times365$

where total sales revenue is an approximation of total credit sales

$Creditor\,days\,ratio\,(number\,of\,days) = {creditors\over cost\,of\,goods\,sold\,}\times365$

where cost of goods sold is an approximation of total credit purchases

$Gearing\,ratio\,= {loan\,capital\over capital\,employed\,}\times100$

• Financial Ratios – an explanation of profitability and liquidity ratios and other financial ratios.

• Stock Turnover

• Inventory Turnover Ratio

• Gearing Ratio