Effeciency Ratios

Question 1

What are efficiency ratios?

Answer 1

Helps assess how efficient an organisation is at managing their finances. Includes assets turnover, stock turnover, payables(creditors days), receivables(debtors) days.

Question 2

Assets turnover evaluation

Answer 2

Ratio shows how hard an organisation is working the assets they own.
The higher the figure the harder they are working the assets.
Typically compared with previous years.
Selling off fixed assets can improve asset turnover quickly.

Question 3

Inventory (stock) turnover

Answer 3

Shows how many times an organisation sells/replaces their stock over given time period.
Higher figure will suggest the organisation is selling more items which should be reflected in the revenue and profits made.
A low figure is bad as stock could depreciate when sitting and not being sold.

Question 4

Receivables days (debtors) evaluation

Answer 4

Shows how long a business is giving their customers to pay when they’ve been given credit.
The number of debtor days varies according to industry but should always be shorter than their creditor days.
DEBTOR MEANS DEBT TO YOU.
Want the figure to be closest to the amount of days you give them to pay.

Question 5

Payables days (creditors) evaluation

Answer 5

Shows how long a business is taking to pay their suppliers when they have been given credit.
The number varies according to industry, want to be greater than debtor days.
CREDITOR MEANS PEOPLE WHO HAVE GIVEN YOU CREDIT.
Ideal figure longer than being given, as long as not annoying suppliers and so longer interest payments.