9609 · 10.2.3
Financial efficiency ratios flashcards
Revision flashcards for Cambridge 9609 Financial efficiency ratios (syllabus 10.2.3). Flip, recall, then mark a real past-paper question.
Card
Asset turnover formula?
Revenue ÷ Capital employed (or net assets).
Card
Inventory days formula?
Inventory ÷ Cost of sales × 365.
Card
Receivables days formula?
Trade receivables ÷ Credit sales × 365.
Card
Payables days formula?
Trade payables ÷ Credit purchases × 365.
Card
Rising inventory days?
Stock building up — slow sales, over-ordering, obsolete stock.
Card
Rising receivables days?
Customers paying slower — credit control weakness or customer cash problems.
Card
High asset turnover?
Generating more sales per $ of capital — efficient (compare with industry).
Card
Cash operating cycle?
Inventory days + Receivables days − Payables days — time cash is tied up.
Card
What is the Asset Turnover ratio and what does it measure?
Formula: Sales Revenue / Net Assets. It measures how efficiently a business is using its assets to generate sales. A higher value indicates greater efficiency.
Card
What does the Inventory Days ratio indicate?
It indicates the average number of days a business holds its inventory before it is sold. A lower number of days suggests efficient inventory management, but risks stock-outs.
Card
What is the Trade Receivables Days ratio and its implication for cash flow?
Formula: (Trade Receivables / Credit Sales) x 365. It measures the average time taken to collect money from credit customers. A shorter period improves cash flow.
Card
What is the Working Capital Cycle?
It is the time it takes to convert net current assets and liabilities into cash. Calculated as: Inventory Days + Receivables Days - Payables Days. A shorter cycle is better for liquidity.
Card
What are the likely consequences of a very low Asset Turnover ratio compared to competitors?
It suggests the business's assets are being underutilised. This could be due to excess capacity, inefficient processes, or poor sales performance relative to the investment in assets, leading to lower overall profitability.