3.6 - Debt/Equity Ratio Analysis

Bankruptcy

Legal process that occurs when an individual or business entity is unable to repay its debts.

Credit control

Ability of a business to collect its debts within a suitable timeframe.

Creditor days ratio

Measures the average number of days it takes for a business to pay its creditors and is an efficiency ratio.

Debt and equity ratios (efficiency ratios)

Allow a business to calculate the value of liabilities/debts against equity.

Measure of financial stability.

Debtor days ratio

Measures the average number of days it takes for a business to collect the money owed from debtors.

Gearing ratio

Measures the percentage of an organization’s capital employed that comes from external sources (noncurrent liabilities, such as mortages.

Insolvency

Financial state where an individual or business entity is unable to pay its debts on time. This may lead to bankruptcy.

Liquidity

How easily an asset can be covered into cash.

Profit quality

Ability of a business to earn profit in the long run.

Stock turnover ratio (inventory turnover ratio)

Measures the number of times a business sells its stock within a year.

Expressed as the average number of days it takes for a business to sell all of its inventory.