Efficiency Ratio Analysis

Efficiency Ratio AnalysisEfficiency ratios of the two organizations comprise of the following parameters from the table given as reference- Inventory Turnover, Creditors Turnover and Debtors Turnover.

Inventory turnover is defined as the average number of days in which the inventory of the organization changes. It is better for an organization to have lower inventory turnover as it means that the average stock of inventory held by the organization is less and thus fewer costs incurred on inventory (Brealey and Meyer, 2000). Premier Investments had an inventory of 73 days in 2010 which got increased to the inventory of 75 days in 2011. For David Jones, on the other hand, inventory of 83 days in 2010 got increased to 88 days in 2011. This means that both the organizations have increased their average stock of inventory from the year 2010 to 2011 which means the extra cost incurred by both the companies on holding the inventory and associated activities. If the two organizations are compared, Premier Investments has done better in keeping the inventory lower than David Jones.

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Debtors Turnover is defined as the average number of days in which the debtors of the organization pay the money to the organization for which they have procured goods from the organization. It is better for an organization to have lower Debtors Turnover as it means that the organization is getting the money from the customers quickly after the sale and can accrue more interest on money obtained early (Broadbent and Cullen, 2003). Premier Investments had a Debtors Turnover of 4 days in 2010 which got reduced to 3 days in 2011. For David Jones, on the other hand, the Debtors Turnover of 1.5 days in 2010 got increased to 2 days in 2011. This means that for both the organizations there is no significant change in the average time to get payment from the customers however Premier Investment has done better than David Jones as the Debtors Turnover has been reduced by it. But if the two organizations are compared, David Jones is in a better position as still after an increase in Debtors Turnover David Jones has a lower value of it against Premier Investments.

Creditors Turnover is defined as the average number of days in which the organization pays the money to its creditors or the suppliers from which it has procured goods. It is better for an organization to have higher Creditors Turnover as it means that the organization is paying the money to the suppliers late after the purchase and can accrue more interest on money paid late (Broadbent and Cullen, 2003). Premier Investments had a Creditors Turnover of 31 days in 2010 which got reduced to 24 days in 2011. For David Jones, on the other hand, the Creditors Turnover of 35 days in 2010 got reduced to 30 days in 2011. This means that for both the organizations there is a significant reduction in the average time to pay the money to suppliers which is bad for both of them as now they are losing the extra income on the interest for money paid less to the suppliers and creditors. But if the two organizations are compared, David Jones is in a better position as its Creditors Turnover is higher than Premier Investment for both the years.

Maddox Smith

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