EFFICIENCY RATIOS

Rate of Inventory
This ratio measures the effectiveness of the inventory, that is, the number of times the
inventory is sold or used in each period. A high rate of inventory means that the inventory is
getting sold rapidly whereas a low rate means customers are not buying the product or there
is too much inventory.
In 2010, the rate of inventory was 6.25 which means that the business was making restocks 6
times in one accounting period. However, in 2011 and 2012, the ratio dropped to 3.19 and
3.02 respectively. There are a few factors which may have contributed to the drastic drop in
the ratio such as goods becoming obsolete, ordering of too much stock and even cash flow
problems.
Solutions
• Reducing the inventory as quickly as possible and determine a better method to track the
inventory.
• Analyse the business’s past performance to have an idea about future sales trend.
• Redistributing excess stock to other locations

Inventory Turnover Period

It is a ratio which determines the number of days a business withholds inventory before
selling it to customers. The lower the inventory turnover period, the better since it would
mean that the company is selling its stock and replenishing. A low ratio would indicate that
the demand for the product might be decreasing.
During the year 2010, Desi’s business had an inventory turnover period of 58 days, which
means that the inventory management was efficient and effective as the number of days
should be as little as possible. In 2011, there was a significant increase in the period, 114 days
in 2011and 121 days in 2012. A longer turnover period may indicate obsolete inventory
which results in lesser cost of sales or there may be a large amount of raw material inventory.
Solutions
• Different advertising techniques can be used in so that the product can reach a larger
number of customers.
• Getting rid of excess inventory or redistributing it to other locations.

NCA Turnover
The ratio measures the annual revenue per unit of non-current assets. A high ratio would
mean that the company’s long-term investments are in the form of debts whereas a low ratio
would signify little debt.
In 2010, Desi’s business had a NCA turnover of 8.30. The high ratio indicates that the
business was not efficient with the non-current assets being used. This could mean that there
were low sales or inventory was held up. Furthermore, the business decreased significantly
with a ratio of 9.57 in 2011 and a ratio of 9.92 in 2012 which could mean that the business
did not manage its non-current assets properly
Solutions
• Keep a regular track of the depreciation of assets
• Make use of better technology systems such as a software which tracks asset’s value and
maintenance