3.6 Efficiency Ratios HL Flashcards
insolvency
when a business can’t pay its debt when they are due to be paid
* no longer able to meet their financial obligations
bankruptcy
when a court of law judges that the business is unable to pay its debts
* often when the assets will be liquidated in order to apy its creditors
difference between insolvency and bankruptcy
insolvency = financial state
bankruptcy = legal state
debtor days
average time it takes to collect money from debtors
creditor days
average time it takes to pay suppliers
strategies to improve debtor days
- only accept cash payments - no trade credit
- reduce trade credit
decrease debtor days
strategies to improve creditor days
- delay payments to suppliers
- change to suppliers who offer more trade credit
increase creditor days
gearing ratio
how reliant the business is on long term liabilities
range is 0-100%
>50% = great financial risk (during times of lower profits and higher interest rates, company would be more susceptible to bankruptcy)
<25% = low risk
25%<x<50% = optimal
as gearing ratio increases:
- relatively higher debt levels
- higher interest payments
- higher risk
stock turnover
2 formulas
how many times stock is bought in per year
how many days does it take for stock to be sold
to improve? hold less stock
how to calc average stock
(opening stock + closing stock)/2
how to calc capital employed
capital employed = non-current liabilities + share capital + retained earnings
strategies to improve gearing ratio
- sell assets to repay loans
- sell shares to repay loans
- pay less dividends
