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Ratios

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Ratios

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  1. Ratios By: Nick Borja

  2. Financial Efficiency Ratios • Assess how efficiently the assets/resources of a business are being used by management • Stock turnover ratio • Debtor days ratio

  3. Stock Turnover Ratio • Records the number of times the stock of a business is bought and resold in a period of time • Least amount of capital used in holding stocks the better • Stock turnover ratio = cost of goods sold / value of stock (average) - Uses average stock holding (value of inventories at the start/end of the year • Stock Turnover ratio (days) = Value of stocks / (cost of sales/365 ) - Measures the average number of days money is tied up in stocks

  4. Points to note: • Number is not a percentage, but the number of times stock turns over in the time period • “normal” results for a business depends on the industry in which it operates • A bigger number = more efficient managers in selling stock rapidly • Just-in-time-leads to a high inventory turnover • Very efficient stock management will give a high inventory turnover ratio

  5. Debtor Days Ratio • Measures how long it takes a business to recover payment from customers who bought goods on credit • A shorter time period means better control over working capital

  6. Points to note • No “right” or “wrong” result -A business selling mainly for cash will have a very low ratio • Value of ratio could be reduced by giving shorter credit terms -30 days instead of 60 days for example