3.6 Efficiency ratio analysis

Question 1

Credit control

Answer 1

Credit control refers to the ability of a business to collect its debts within a suitable timeframe.

Question 2

Creditor days ratio

Answer 2

Creditor days ratio is an efficiency ratio that measures the averagenumber ofdaysit takesfora businessto payitscreditors.

Question 3

Debtor days ratio

Answer 3

Debtor days ratio is an efficiency ratio that measures the average number of days it takes for a business to collect the money owed from debtors.

Question 4

Efficiency ratios

Answer 4

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 averagenumberof daystaken to collect money from its debtors.

Question 5

Gearing

Answer 5

Gearing measures the percentage of a firms capital employed thatcomes from external sources (long-term liabilities), suchas debentures and mortgages. Firms thathave atleast 50% gearing are said to be highly geared.

Question 6

Stock turnover ratio

Answer 6

Stock turnover ratio measures the number oftimes a business sells its stocks within a year. It can also be expressed as the average number of days it takes for a firm to sell all of its normal inventory.q