3.6 Efficiency Ratio Analysis

• Insolvency is when businesses are unable to settle their debts but can recover.
• Bankruptcy is a formal legal declaration that the firm can't settle its debt and even if all assets sold that would still not be enough. The business ceases trading.
• Stock turnover indicates the speed at which a firm sells and replenishes all its stock.
• Stock turnover (number of times)= cost of sales / average stock
• Stock turnover (number of days)= average stock / cost of sales x 365
• Debtor days = debtors / total sales revenue x 365
• 30 to 60 days is a good benchmark for debtor days.
• Creditor days = creditors / cost of sales x 365
• Creditor days describes how many days it takes on average for a business to pay its trade creditors.
• 30 to 60 days is a good benchmark for creditor days.
• Gearing ratio = non-current liabilities / capital employed x 100
• Capital employed = non-current liabilities + equity