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3.6 Efficiency Ratio Analysis - Coggle Diagram
3.6 Efficiency Ratio Analysis
Efficiency Ratios
These ratios assess the utilization of a firm’s resources in terms of its assets and liabilities.
Stock Turnover Ratio
Measures how quickly a firm’s stock is sold and replaced over a given period.
Can be calculated using two approaches : how many times a firm sells its stock in a given period and the number of days it takes to sell the stock.
Possible Strategies to improve
Slow-moving or obsolete goods should be disposed of.
Offer a narrower, better-selling range of products.
Keep low levels of stock
Debtor Days Ratio
Measures the number of days it takes on average for a firm to collect its debts from customers it has sold goods to on credit.
Assesses how efficient a business is in its credit control system
Possible Strategies to improve
Provide discounts or other incentives.
Impose stiff penalties for late payers such as fines.
Stop any further transactions with overdue debtors until payment is finalized.
Creditors Days Ratio
Measures the average number of days a firm takes to pay its creditors.
Assesses how quickly, usually within a year, a firm is able to pay its suppliers,
Possible Strategies to improve
Having good relationships with creditors such as suppliers.
Having effective credit control.
Gearing Ratio
This measures the extent to which the capital employed by a firm is financed from loan capital.
Possible strategies to improve
Seek alternative sources of funding that are not “loan related”,
Decrease or not issue dividends to shareholders.