3.06 Efficiency Ratios

Stock Turnover (inventory turnover ratio)

Measures the number of times a firm sells its stock within a time period, usually a year. This ratio, therefore, indicates the speed at which a firm sells and replenishes all its stock.

Debtor Days (debt collection period)

This measures the average number of days it takes a firm to collect money from its debtors (customers who pay later). The less time it takes for customers to pay off their debts, the better the improved cash flow and opportunity cost of reinvesting.

Creditor Days

This measures the number of days it takes on average for a business to pay its trade creditors.

Gearing Ratio

Assess a firm’s long-term liquidity position. This is done by examining the firm’s capital employed that is financed by long-term debt, such as mortgages. High gearing ratio – the larger the firm's dependency on long-term sources of borrowing.

Insolvency

When a business cannot pay its debts and must stop trading. It occurs when liabilities exceed the business’s ability to repay.

Bankruptcy

Occurs when a business ceases to trade and the value of its possessions are distributed to its creditors