3.6 - Equity Analysis Ratios Flashcards
Define stock turnover
Shows how quickly the organisation sells and replenishes stock
Define debtors days
Shows how long it takes to collect debts
Define creditors days
Shows how long it takes to pay creditors
Define gearing
Shows the extent of reliance on loan capital
What are the 3 equations for stock turnover
- Stock turnover (number of times) = cost of sales / av stock
- Stock turnover (number of days) = average stock / cost of sales x 360
- Average stock = (opening stock + closing stock) / 2
What does the lower the stock turnover mean
The more efficiency an organisation is in generating profits
If COGS is £100 and the average stock level is £20 what is stock turnover
5 x a year of every 73 days
What are 2 strategises to improve stock turnover
- hold lower stock level
- introduce JIT
What is the equation for debtors day ratio
= debtors / sales rev x 365
What does a lower and higher debtors day ratio imply
Low - the more likely customers are to look for other supplies
High - the more likely a organisation is to face liquidity issues
If debtors are 100 and rev is 500 what is DDR
Meaning it takes 73 days on average to collect debts from customers who bought items using credit
What are strategies to improve DDR
- offer discounts in exchange for early payments
- threaten late debtors with law suit
What is the creditor day ratio equation
= creditors / cost of sales x 360
What does a high creditor day ratio mean
The more time to pay for current liabilities but the worse the relationship is with the supplier
100 is owed to suppliers and 500 worth of COG what is the creditor ratio
73 days, meaning it takes 73 days on average to pay suppliers
What are 2 strategies to improve creditor days ratio
- developing trustworthy relationships with suppliers
- look for other suppliers that offer more favorable terms
What is the equation for gearing ratio
Loan capital / cap employed x 100
What does a high gearing ratio mean
The more dependency on long terms borrowings is therefore lower net profit
100 of non current liabilities and 500 of capital employed what is the gearing ratio
20% which means 1/5 of sources of fincances comes from external sources
What are strategies to improve gearing ratio
- issue more shares
- don’t pay dividence
What is insolvency v bankruptcy
Insolvency
- situation
- can’t pay on time
- current liabilities
- current ratio
- flexible
Bankruptcy
- process
- can’t pay at all
- current assets
- acid test ratio
- in flexible
