Financial efficiency (A level BS)
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Contents |
Asset Turnover
SALES TURNOVER/ASSETS EMPLOYED (It is expressed as a ratio, e.g. 3.7 : 1)
The ratio measures the productivity or efficiency of a business in using its assets. It shows how many £’s of sales are generated for every £1 of net assets. Analysing the ratio needs to take into consideration the type of business sector.
Stock Turnover
COST OF SALES/AVERAGE STOCK VALUE
This ratio measures the number of times during the year that a business sells the value of its stocks. Stock turnover helps to answer questions such as “Have we got too much money tied up in stock?”.
Average stock is calculated: (OPENING STOCK + CLOSING STOCK)/2
(If no opening stock figure is available just use closing stock from the balance sheet) A higher stock turnover or a lower number of days is preferable as it indicates that stock is being sold more quickly.
Debtor Days
TRADE DEBTORS(average if possible/SALES TURNOVER x 365
The “debtor days” ratio indicates whether debtors are being allowed excessive credit. A high figure (more than the industry average) may suggest general problems with debt collection or the financial position of major customers. It may also indicate the need for improved credit control. A lower figure is preferable but what is acceptable will vary from sector to sector.
