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Learning more about the significance of Stock

By using Ratio Analysis the words in the Balance Sheet and Profit and Loss Account can tell us something about how well the business has performed.
Stock is used in the Stock Turnover ratio (Ratio 4 below) and can therefore tell us something about the efficiency of the business.
The higher the figure the quicker the business is turning stock around.
In other words the bigger the ratio the better.
Sometimes expressed as number of weeks /months stock is left hanging around the warehouse. If this is the case then the bigger figure is not the better figure.
In other words stock stored for 6 months indicates poorer efficiency than stock stored for 3 months. i.e. Big is bad.
Other common ratios are also listed below .
Profitability
1 Return on Capital Employed = Profit x 100 = %
Capital

2 Gross Profit Ratio = Gross Profit x 100 = %
Sales

3 Net Profit Ratio = Net Profit x 100 = %
Sales

Efficiency Ratios
4 Stock Turnover Ratio = Cost of Goods Sold = No of times
Average Stock

5 Fixed Assets Turnover Ratio = Sales = No of times
Fixed Assets at NBV

6 Debtor Collection Period        = Average debtors     x 365 = No of days
                                                                   Sales             x   52 = No of weeks
                                                                                         x 12   = No of months

7 Suppliers Payment Period       =    Creditors               x 365   = No of days
                                                          Purchases               x 52    = No of weeks
                                                                                          x 12    = No of months

8 Asset Turnover = Sales = No of Times
Capital Employed

Liquidity Ratios
9 Current Ratio = Current Assets = Expressed as a
Current Liabilities Factor

10 Quick or Acid Test = Current Assets - Stock [Also expressed as a Factor]
Current Liabilities

Investment Ratios
11. Gearing = Preference Shares + Long Term Loans X 100%
Shareholders funds + Long Term Loans

A Note of caution:
Ratio Analysis is all about comparing one set of ratios with another.
This can mean comparing one year with another, or comparing the performance of one company with another or with its budgets.
To achieve greater confidence in the conclusions you draw, you really need to compare more values than just two. You also need to bear in mind that there is some flexibility in the accounting treatments adopted by accountants when preparing the financial statements and so differences observed in performance might in part be due to differences in the way items have been treated in the accounts rather than differences in performance.
Now test your understanding by attempting to calculate stock turnover ratio from our own figures.
First you need to know whether to examine the trading, profit and loss account or the balance sheet.
If you make a mistake you may return here, for another try, by pressing your internet return button. You must return to this point in any event if you wish to take a peep at the answer
Trading, profit and loss account Balance sheet

answers to stock turnover ratio

stock turnover ratio = cost of sales = number of times stock turns over
                                     average stock
                                  = 500 (note2) = 2 times
                                     250 (note1)
This means that stock is turning over twice a year and is therefore held for an average of 6 months before a customer can be found.
Note 1. Cost of sales is the same as cost of goods sold and the figure is obtained from the   trading part of the trading, profit and loss account.
Note 2.   Average stock is the value of stock at the beginning of the period added to stock value existing at the end of the period divided by two. Or in accounting language we say :

average stock = opening stock + closing stock 2 = £200 + £300 2 = 250 Return to the question