3.6.1 (HL)—Efficiency ratios

Efficiency ratios show how effectively a business manages stock, customer credit, supplier credit and long-term finance. Debtor days = debtors ÷ credit sales × 365; creditor days = creditors ÷ cost of sales × 365; stock turnover compares cost of sales with average stock; gearing compares non-current liabilities with capital employed.

Lower debtor days usually means faster collection; higher creditor days can preserve cash but may damage supplier trust. A high stock-turnover rate can indicate efficient sales, while high gearing increases financial risk and interest exposure.

With debtors of €31,200 and credit sales of €241,200, debtor days are about 47.23. Interpret the number against agreed terms, product cycle and industry rather than treating a single benchmark as universally good.

Every efficiency ratio has a trade-off and a denominator that matters. Never compare ratios across unrelated sectors without checking business model, seasonality and accounting definitions.

Use complete, consistent formulas: average stock $=(\text{opening stock}+\text{closing stock})/2$; stock turnover $=\text{cost of sales}/\text{average stock}$, reported as times per year; debtor days $=\text{trade receivables}/\text{credit sales}\times365$; creditor days $=\text{trade payables}/\text{credit purchases}\times365$ (cost of sales may be used only when the course data require that convention); gearing $=\text{non-current liabilities}/\text{capital employed}\times100$. State the convention used and do not mix annual and partial-period figures.