Efficiency ratio analysis Flashcards
What are the FOUR types of efficiency ratio’s
- stock turnover
- debtor days
- creditor days
- gearing ratio.
what is stock turnover-how to calc
“A measure of the number of times, on average, that a company sells and replenishes its stock; or the rate at which a manufacturing business uses its stock of resources in a given time period.”
this ratio looks at how efficiently ur business is able to receive stock once its finished.
This ratio is represented in days or times.
Times = cost of sales / avg stock.
Days = cost of sales / avg stock X 365
eg. I get my stock 4 times a year or after 40 days.
what is debtor days - how to calc
“The debtor days ratio measures the average number of days it takes the business to collect its debts. Typically, credit periods can be 30, 60 or 90 days. The shorter the period, the better for the business. “
looks at how much money OTHER PPL/ENTITIES OWE U.
this is only reped in days
days = debtors / sales revenue X 365
what are creditor days - how to calc
“The creditor days ratio is an indicator of the average number of days it takes a business to pay its debts. It is fairly common for businesses to buy resources on credit, with a payment period of 30, 60 or 90 days, depending on the amount and the trust between the business and the supplier.”
how efficiently ur able to pay back other ppl/entities - aft how many days.
days = creditors / sales revenue X 365.
gearing ratios - how to calc
“The gearing ratio measures how much of the business’s capital employed is financed by long-term debt, such as non-current liabilities. The higher the gearing ratio, the more of the business’s operations are funded by long-term debt.” - not good.
this Is presented as a percent - it looks at how much of ur non-current/long term liabilities account for ur capital employed.
so it looks at how much debt in ur account is to pay back ur capita/assets aka machinery.
how to calc avg stock?
opening stock + closing stock / 2
how to calc cost of sales
fixed n variable costs so ur direct n indirect expenses - so everything bro.
what resources can u use to find values to calc ur debtor days?
The value for debtors is taken from the statement of financial position (balance sheet). The sales revenue is obtained from the statement of profit or loss.
what’s cash flow
money going in and outta the business.
Payments received by a business (inflows) and payments made by a business (outflows).
what resources can u use to find values to calc ur creditor days?
The creditors figure comes from the statement of financial position (balance sheet). The cost of sales figure comes from the statement of profit or loss (income statement or profit and loss account).
when calcing ur stock turnover ratio should the days n times be low or high.
days = low
times = high
meaning ur bus is efficient enuf to meet its demand and get/run outta stock quickly, but not soo quick which may indicate quality issues.
shld ur debtor days be low or high
low - but depends on creditor days.
if ur creditor days r 55 and ur debtor days r 30 this is gooooooooodddd very good bcz u can use the money ur debtors give u to pay back ur creditors - equilibrium.
shld ur creditor days b low or high
usually high bas not too high - this means that u have more time to pay back ur creditors.
shld ur gearing ratio be low or high
this shld be between 25-50% which indicates that half or less than half of ur long term debt is cuz of ur capital. - which would tell u that yah u have one main thing to focus on/pay off bas u have other things vital to the bus that u needa handle asw.
