Efficiency Ratio Analysis (HL)

Profitability, ratios, look, at, whether, your, business, earns., Liquidity, ratios, ask, if, it, can, pay, its, bills., Efficiency, ratios, focus, on, a, different, question:, how, well, does, it, use, its, assets, and, relationships?

Inventory, turnover, =, cost, of, goods, sold, ÷, average, inventory., This, shows, how, many, times, stock, is, sold, and, replaced, in, a, year., A, higher, number, is, usually, better,, since, stock, that, sits, still, means, cash, that's, stuck., However,, benchmarks, vary, by, industry., A, supermarket, turning, stock, 20, times, a, year, is, normal,, while, a, jeweller, turning, it, twice, can, still, be, healthy.

Debtor, days, =, (accounts, receivable, ÷, revenue), ×, 365., This, tells, you, the, average, days, customers, take, to, pay., If, debtor, days, rise,, your, firm, is, financing, customers, longer., This, can, drain, cash,, even, if, sales, look, good.

Creditor, days, =, (accounts, payable, ÷, cost, of, goods, sold), ×, 365., This, measures, the, average, days, your, firm, takes, to, pay, suppliers., Longer, terms, may, seem, like, free, finance,, and, they, can, be—up, to, a, point., If, pushed, too, far,, it, can, hurt, supplier, relationships, and, cost, you, priority,, credit, terms,, or, even, product, supply.

The, key, comparison, is, between, the, two., If, debtor, days, exceed, creditor, days,, your, business, pays, out, before, it, gets, paid., You’ll, need, to, fund, that, gap, with, working, capital., If, the, gap, widens, or, your, business, grows,, the, funding, requirement, increases, too.

Gearing, =, (non-current, liabilities, ÷, capital, employed), ×, 100., This, measures, the, share, of, long-term, finance, that, comes, from, debt., Higher, gearing, can, boost, returns, to, owners, when, trading, is, good., But, it, also, raises, the, risk, of, distress, when, times, are, tough, because, interest, must, be, paid, no, matter, what.