3.6 Efficency Ratio Analysis

Stock Turnover - Measures the number of times a firm sells its stock within a time period, usually over the fiscal year. It assesses the speed at which a firm sells and replenishes all its stock.

Stock Turnover (number of times) = cost of goods sold / average stock quantity

Stock Turnover (number of days) = (average stock quantity / cost of goods sold) x 365

Debtor Days - Measures the number of days it takes a firm, on average, to collect money from its debtors, otherwise known as the debt collection period. Debtors refer to customers who have purchased items on trade credit.

Debtor Days = (debtors / sales revenue) x 365

Creditor Days - Measures the number of days it takes, on average, for a business to pay its trade creditors.

Creditor Days = (creditors / cost of goods sold) x 365

Gearing Ratio - Used to assess a firm’s long-term liquidity position, by measuring how much of the firm’s capital employed is financed by long-term debt.

Gearing Ratio = (long-term liabilities / capital employed) x 100

Gearing Ratio = (loan capital / capital employed) x 100