Efficiency, gearing and limitations
| English | Chinese | Pinyin |
|---|---|---|
| efficiency | 效率 | xiào lǜ |
| inventory turnover | 存货周转率 | cún huò zhōu zhuǎn lǜ |
| gearing | 杠杆比率 | gàng gǎn bǐ lǜ |
| capital employed | 所用资本 | suǒ yòng zī běn |
| qualitative | 定性 | dìng xìng |
How hard are the assets working?
- Beyond profit and cash, owners want to know: is the firm using its resources efficiently, and is it over-borrowed?
- A second set of ratios answers these — but every ratio has limits.
Business case lab
Classify real decisions so the main business concept becomes concrete.
Cost of sales is 240 and average inventory is 40. What is the inventory turnover (times)?
240 ÷ 40 = 6 times a year.
Efficiency 效率 ratios
- Inventory turnover 存货周转率 = cost of sales ÷ average inventory — how many times stock is sold and replaced.
- A higher turnover usually means stock isn't sitting idle.
Worked example. Cost of sales 120, average inventory 30 → inventory turnover = 120 ÷ 30 = 4 times a year. The firm sells and replaces its stock four times annually.
Efficiency ratios measure how hard a firm's assets are working, read from the balance sheet
Long-term liabilities are 80 and capital employed is 200. What is the gearing (%)?
80 ÷ 200 × 100 = 40%.
A highly geared business is most at risk when:
High gearing means large interest payments — dangerous if rates rise.
A business that relies heavily on borrowing is said to be highly ______.
High gearing = heavy debt relative to capital employed.
Gearing 杠杆比率
- Gearing = non-current (long-term) liabilities ÷ capital employed 所用资本 × 100.
- High gearing (over ~50%) means heavy reliance on borrowing — risky if interest rates rise.
Which are limitations of ratio analysis? (Select all that apply.)
Ratios are backward-looking and need context; they do not predict perfectly.
Limitations of ratios
- Ratios use past data and ignore the future.
- They miss qualitative 定性 factors (staff morale, brand, market trends).
- They are only useful compared — to past years, rivals, or targets.
A ratio means nothing on its own. A current ratio of 1.5 is only "good" compared with something — last year, a competitor, or the industry norm. Always interpret ratios in context.
You've got it
- inventory turnover = cost of sales ÷ average inventory (higher = stock moving)
- gearing = long-term liabilities ÷ capital employed × 100 (high = borrowing-reliant, risky)
- ratios use past data, miss qualitative factors, and need comparison to mean anything