3.6 Efficiency Ratio Analysis

Stock turnover ratio: how quickly a firm’s stock is sold and replaced over a given period.
Number of times per year = costs of goods sold/stock

Number of days = stock/costs of goods sold x 365

More days/more times = less efficiency

Debtor days: Customers who paid by credits. The number of days it takes on average for a firm to collect its debts.

More days = inefficient

Creditor days: Measures the average number of days a firm takes to pay its creditors.

Gearing ratio: Measures the extent to which the capital employed by a firm is financed from loan capital.

Lower = less risks = better financial position

Insolvency - the financial condition of being unable to pay existing debts as scheduled, or when they are due. A temporary state faced by the business

Bankruptcy - a last resort and a legal declaration and process for dealing with prolonged insolvency issues

Differences: