3.6 (HL Only) Efficiency Ratios and Their Analysis

These flashcards cover key concepts, definitions, and strategies regarding efficiency ratios from the lecture notes.

What does the efficiency ratio measure?

It measures how well a company utilizes its resources to make a profit.

What is stock turnover?

Stock turnover measures the number of times a firm sells its stock within a time period, usually one year.

What does a higher stock turnover indicate?

A higher stock turnover indicates that a firm is selling and replenishing its inventory more quickly, which is better for the business.

What is the benchmark for debtor days?

The benchmark for debtor days for a healthy business is usually between 30 to 60 days.

How can a business improve its debtor days ratio?

By imposing charges on late payers, offering discounts for early payment, refusing further business with slow payers, or threatening legal action.

What are creditor days?

Creditor days measure the average number of days it takes for a business to pay its trade creditors.

Why might a high creditor days ratio be beneficial?

It frees up cash to be used elsewhere, but it may also pose risks of late payment penalties.

What does a gearing ratio of 50% or more indicate?

It indicates that a firm is highly geared and may be vulnerable to changes in interest rates.

What is a debenture?

A debenture is a type of debt instrument issued by companies to raise capital, and it is not secured by physical assets.

Identify one strategy to improve stock turnover.

Holding lower stock levels to require more frequent replenishment.