¡Descarga Ensayo Nivel Superior, Monografías, Ensayos de Lengua y LiteraturaEnsayo Nivel Superior, M y más Esquemas y mapas conceptuales en PDF de Economía solo en Docsity! The following ratios are measures of efficiency (AO2/AO4) Inventory/stock turnover This ratio measures a firm’s success in converting stock into sales. The ratio uses the cost of goods sold (cost of sales), without any profit margin. If the firm makes a profit on each sale then the faster it sells stock, the greater the profit it earns. Too high a stock turn may indicate that a firm cannot match customer demand, which may lead to dissatisfaction and lost sales. Stock turnover levels vary between companies and industries. A fruit seller may sell total stock every one or two days – approximately 110 times per year. A plane manufacturer will have lower stock turn, but the profit on one plane is far higher than on one apple! stock turnover=cost of goods sold (COGS)÷average stock=times OR stock turnover=average stock÷cost of goods sold×365 = days The first equation measures how many times in a period (usually the financial year) the firm turns over its stock. If you imagine a cupboard full of products, then stock turn is the number of times the entire content of the cupboard is sold. The second equation shows the time, in days, to turn over the total stock – or the time taken to sell the content of that stock cupboard. Firms only earn profit when they sell goods, so firms want the lowest possible figure, allowing it to restock and sell again. The ratio can be improved by holding less stock or by increasing sales. Debtor days Debtors are customers, who owe the firm money for products bought on credit. Debtors have the firm’s products, but are yet to pay, so should be carefully controlled. However, better credit terms may result in higher market share. This ratio represents the average time, in days, taken to collect trade debts and provides feedback on debt management. If debtors take too long to pay, the firm may experience difficulty paying its debts. debtor days=debtors÷sales revenue×365 = days Some debtors will never pay, so are ‘written off’. This ‘improves’ the ratio, but reduces the asset value of the firm. Creditor days This ratio measures the length of time it takes the firm to pay its creditors. In general, the firm should maximise the period it takes to pay its debts. In this way, it has the products required, but still has the money for these in its bank account gaining interest. creditor days=creditors÷sales revenue×365 = days A high creditor days figure may indicate that the firm is losing out on discounts for early repayment. It is important to place this ratio in the context of the industry in which it operates, e.g. food retailers have lower creditor days ratios than manufacturers. Note: There should be a link between debtor days and creditor days. Creditor days should be at least as long (or short) as debtor days. One can finance the other. Gearing ratio Once operating, businesses have two main sources of funds for investment: 1. 1. Loan capital from banks, and other institutions (Debt). 2. 2. Share capital and reserves, including retained profit (Equity). Most firms use a mix of borrowed capital and their own finance. There are advantages and disadvantages to both sources. Advantages Disadvantages Loan capital Once repaid, still have the assets bought with no more charges to be met. Have to pay interest, even if there is no profit. Interest payments reduce profit. Share capital No interest. Dividends optional. Share issues to raise capital can be costly. The number of shares that can be sold is limited. Share capital and retained profits are free of fixed charges; only dividends need to be paid. However, this form of capital is restricted and relying on it alone may slow growth. The balance between loans and share capital is important. Gearing measures the proportion of capital employed that is provided by long-term lenders. The gearing ratio is sometimes known as the debt equity ratio. gearing ratio = loan capital ÷ total capital employed×100
