3.6 Efficiency Ratio Analysis

Question 1

Stock Inventory/Turnover Ratio

Answer 1

Measures the number of times a business sells out of stock within a given time

Question 2

Debtor Days Ratio

Answer 2

Measures the number of days on average that it takes a business to collect money from debtors

Question 3

Creditor Days Ratio

Answer 3

Measures the number of days on average that it takes a business to pay its trade creditors

Question 4

Gearing Ratio

Answer 4

Used to assess a business’ long term liquidity position.

Question 5

Insolvency

Answer 5

A state of financial distress where a person or business is unable to meet their debt obligations. As a result, legal action can occur where assets are liquidated to pay as much debt as possible.

Question 6

Bankruptcy

Answer 6

A legal declaration and process where businesses can no longer pay back their debt. Once a business is declared bankrupt, all remaining debt can be written off.