Efficiency/Performance Ratios

Question 1

What is the use of these ratios?

Answer 1

They look at:

1) How assets are used to generate profits
2) How well stock is managed
3) How long before customers settle their accounts (Credit control).

Question 2

What is the formula for STOCK TURNOVER?

What does it measure?

Answer 2

Cost of sales / Average stock held

• Measures how quickly a business uses or sells stock.
• A high figure is better as it shows that a business is trading quickly and receiving profit for the stock it has invested in.

Question 3

What is the formula for ASSET TURNOVER?

What does it measure?

Answer 3

Sales revenue / Net assets

• Measures how much turnover is made from the assets the business owns.
• A higher figure is better. However the amount will vary depending on the industry

Question 4

What is the formula for DEBTOR DAYS?

What does it measure?

Answer 4

(Trade debtors / sales revenue) x 365

• Measures the average number of days it takes for a business to collect debts from debtors.
• A short debt collection period is better. It improves cash-flow if the business actually has the money for goods rather than being owed the money.