ANALYSIS OF PUBLISHED
ACCOUNTS (5.8)
( Chapter 35 - A level 5.8 )
In a previous topic, we went over profitability ratios, which measure the overall
performance of a business, and liquidity ratios, which shows the ability of a firm to pay its
short term debts.
There are also other ratios used to measure more aspects of business activity. These are :
❖Financial efficiency ratios
❖Gearing ratios (measure risk)
❖Investor ratios (used by shareholders)
Efficiency
ratios
Financial efficiency ratios show a business how well they are using their resources. They
are usually used when liquidity ratios have identified potential liquidity problems.
Efficiency ratios help to narrow down the precise nature of the problem. The two efficiency
ratios are :
●Inventory turnover - is the rate that inventory stock is sold, or used, and replaced.
Ultimately, the inventory turnover ratio measures how well the company generates
sales from its stock.
The higher the number, the more efficient the managers are in selling inventory
rapidly. The result is not a percentage but the number of times inventory turns over
in the time period – usually a year.
●Days in sales receivables - this ratio measures the number of days, on average, it
takes the business to recover payment from customers who have bought goods on
credit – the trade receivables.
There is no right or wrong result, it will vary from business to business. If it takes
too many days (ratio is too high) then the management of credit collecting is poor,
if it takes too little days (ratio too low) then customers may ask for more credit.
A business selling almost exclusively for cash will have a very low ratio
result. The result will be in days.
