TERMS Unit 3: Finance and accounts Chapter 18: Debt/ equity ratio analysis HL

working capital

the capital needed to pay for raw materials, day-to-day running costs and credit offered to customers. In accounting teams:

working capital = current assets - current liabilities

stock turnover

measures the number of times inventory is converted into sales in a period of time, usually one year;

stock turnover (number of times) = cost of sales / average value of stock

average value of stocks held during the year

[opening stock (at start of year) + closing stock (at end of year)] / 2

stock turnover ratio (days)

average stock/ cost of goods sold x 365

debtor days

how long, on average, it takes the business to recover payment from customers who have bought goods on credit;

debtor days = debtors/total revenue x 365

creditor days

the average length of time taken to pay suppliers;

creditor days = creditors/cost of sales x 365

gearing ratio %

measures the proportion of long-term capital invested in the business that is borrowed;

gearing ratio (%) = non-current liabilities / capital employed x 100

bankruptcy

a legal proceeding carried out to allow individuals or businesses freedom from their debts, while simultaneously providing creditors an opportunity for repayment

liquidation

the process of bringing a business to an end and distributing its assets to claimants such as creditors - usually done by selling the assets of the business and distributing the cash raised

insolvency

a state of financial distress in which a person or business is unable to pay their debts. This can lead to liquidation