Accounting - Key ratios - efficiency

Key ratios - efficiency

RATIO
FORMULA
EXPLANATION

EFFICIENCY

1. Debtors turnover
Credit sales/average debtors
This ratio may be measured in 'times per annum' or in days. It shows how
quickly the money is returned to the business when goods are sold on
credit. To evaluate the effectiveness of this ratio it has to be compared
to the credit terms offered to debtors.

2. Stock turnover
Cost of sales/average inventory
Measures how quickly stock (inventory) is sold on average. Like debtors
turnover it may be measured in 'times per annum' or in days

3. Creditors turnover
Credit purchases/average creditors
This measures the average time taken to pay creditors. When compared to
the credit terms offered by creditors it may indicate if the business is
taking advantage of discounts.

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