Financial Reporting and Ethics - The Institute of Chartered ...

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTScalculation of this ratio. This ratio is sometimes simply referredto as Debtors’ ratio and it is a measure of the collection period.Changes in this ratio indicate changes in the company’s abilityto collect its debts or in its credit policy.4.7.4.3 Creditoreditor’s ’s Days (Payment) RatioThis is the ratio of creditors to credit purchases and it iscalculated as follows:Trade CreditorsCredit Purchasesx 365 daysThe ratio shows how quickly creditors are paid. The lower theratio, the better for the creditors who only have to wait for a shortperiod to get paid for the goods supplied or services rendered.4.7.4.4 Capital Turnover RatioThis is the ratio earlier on referred to under profitability ratiosas one of the secondary ratios. It is also known as asset turnoverratio. It is computed by:Salesx 100%Capital EmployedAgain, as in the case of the primary ratio, this ratio can becalculated in several ways, depending upon the interpretationgiven to the denominator.4.7.5 Financial Structure (Leverage) RatiosThese are the ratios used to test the solvency of the company, that is, theability of the company to meet the interest costs and repayment schedulesassociated with its long-term obligations. Some of the ratios inthis group are:4.7.5.1 Capital Gearing RatioThis indicates the relationship between the ordinary sharecapital of a company and fixed interest capital (that is, debentures,preference share capital, and other bank loans). This ratio isdefined in two different ways thus:Loan CapitalEquity CapitalORLocal CapitalTotal Capital81