Unit 3.6 Debt / Equity Ratio Analysis

Question 1

Stock turnover ratio

Answer 1

measure how quickly a firm’s stock is sold and replaced over a given period

Question 2

Possible strategies to improve the stock turnover ratio

Answer 2

• adapt to just-in-time production / if there are any delays it could negatively affect sales
• reducing a wide range of products

Question 3

Debtor days ratio

Answer 3

measure the average number of days it takes a firm to collect 100% of its debts (debt collection period)

Question 4

Possible strategies to improve debtor’s day ratio

Answer 4

• provide discounts to encourage debtors to pay early / receive less income
• impose stiff penalties / might lose loyal customers
• stop further transactions with over due debtors / not guarantee payment

Question 5

Creditor’s days ratio

Answer 5

measures the average number of day it takes to pay its credits or debts

Question 6

Possible strategies to improve creditor’s ratio

Answer 6

• good relationship may enable negotiation / refuse support
• effective credit control / not easy task

Question 7

Gearing ratio

Answer 7

measure the extent to which the capital employed by a firm is financed from a loan capital

Question 8

strategies to improve the gearing ratio

Answer 8

• seek alternative sources of funding / which may take a long time and go against the objective
• not issue dividends / may lead to resentment from shareholders

Question 9

Insolvency

Answer 9

a financial position where a person or a firm cannot meet their debt payment in time

Question 10

Bankruptcy

Answer 10

a legal process that happens when an individual or a firm declares that they can no longer pay their debts to creditors