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efficiency ratio analysis (gearing ratio (notes : (shows the extent to…
efficiency ratio analysis
inventory (stock) turn over
ratio = costs of goods sold / inventory level
improvement
reduce inventories of finished good
reduces inventories of raw materials
just in time inventory management system
notes
the result is not the percentage but the number of inventory
the higher the number, the more efficient the business
debtor days ratio
measure the average length of times it takes the business to recover payment from customer who using credit card
formula : revenue/debtors (accounts receivable)
notes
the are no 'right' of 'wrong' result
a debtor days ratios may be deliberate management strategy
improvements
sell only to customer who pay cash
ask debtor to pay quickly
use debt factoring by selling debtors' invoices to factoring company for cash
creditor days ratio
measure how quickly a business pay its suppliers during the year
formula : (trade creditors/ credit purchases) x 365
notes
high result of ratio means the business slow to pay its supplier
new start-up business not offered any credit by supplier
improvement
delay payment to supplier
ask all the extended credit terms
only purchases from supplier with extended credit card
gearing ratio
measure the degree to which capital of the business is financed from long term loans
formulae : (long term loan / capital employed ) x 100
notes :
shows the extent to which company's assets are financesd from the external long term ources
higher ratio, greater risks
low gearing indicate safe business strategy
could be reduce by using non-loan sources of finance to increase capital employed
alternative gearing ratio : ( long-term debt / shareholder' equity) x 100
improvement
sell assets and use proceeds to repay loans
sell shares
keep retained profit level as high as possible