Efficiency ratios - use and calculation
Use of the ratios
The individual ratio for a single year is of limited value. What are important are trends over time and comparisons with other firms in the same industry. These ratios are very industry specific.
As always, you need sets of ratios for a series of years, plus the corresponding information for the competition to really get value from the exercise.
Improving the ratios
Remember, there is little point in improving ratios as such. It is the business that is being improved, and the ratio values will reflect this improvement.
Asset turnover: Get sales up, assets down, or a combination of both.
Stock turnover: Get sales up, stock down, or a combination of both.
Debtor days: Get debtors down, sales up, or a combination of both.
Remember, ratios are like symptoms of a disease (or of health). You get nowhere treating symptoms; you must get to the root of the problem.
Calculation of ratios - asset turnover, stock turnover and debtor days
Follow the link below to get the balance sheet and profit and loss account for Student Computers plc and use them to work out the asset turnover, stock turnover and debtor days ratios - it will be good practice. Once you have had a go, and then follow the answer link below to see how you got on. N.B. Calculate the ratios for both years to compare them.
Student Computers Plc - balance sheet and profit and loss account
Answer -asset turnover, stock turnover and debtor day's ratios
Calculation of ratios - ROCE
Follow the link below to get the balance sheet and profit and loss account for Student Computers plc and use them to work out the ROCE - it will be good practice. Jot down some notes on how well the firm has performed. Once you have made your calculation, follow the answer link below to see how you got on. N.B. Calculate the ratio for both years to compare them.
