IB Business Management – 3.6 Debt/equity & efficiency ratios (HL)

Focus: Stock turnover, debtor days, creditor days & gearing ratio

Welcome to 3.6 Debt/equity & efficiency ratios (HL)

This workbook focuses on the HL-only efficiency ratios in the IB BM syllabus: stock turnover, debtor days, creditor days and gearing, plus the difference between insolvency and bankruptcy.

HL Finance & accounts

Why this topic matters

These ratios reveal how efficiently a business is using its assets and managing its debts. A manager who can read and interpret them quickly has a huge advantage in Paper 1 data-response questions and Paper 2 calculation questions.

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Exam link. 3.6 often appears alongside profitability and liquidity ratios. You might be asked to calculate several ratios from a set of final accounts and then explain what they suggest for shareholders, lenders or managers.

How to use this mini-course

  1. Read Ratios 101 to get the formulas and meaning clear in your head.
  2. Use the Quick checks to make sure the ideas have landed.
  3. Complete the three calculate ratios practices using realistic data.
  4. Work through the interpretation practice – these are close to exam-style AO2–AO4 questions.
  5. Open the Flashcard studio to memorise key terms.
  6. Finish with the 20-question quiz and review the explanations.
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Tip. Try to picture each ratio rather than memorising it. For example, debtor days is “how long customers take to pay”; creditor days is “how long we take to pay others”.

Ratios 101 – structure & formulas

Focus on the four 3.6 ratios and what they tell us about a business.

Core Ratios & meaning

Efficiency ratios – what they measure

Efficiency ratios look at how effectively managers control the internal operations of the business:

  • Stock turnover – how quickly stock is converted into sales.
  • Debtor days – how long customers take to pay.
  • Creditor days – how long the business takes to pay suppliers.
  • Gearing – how much of capital employed is financed by long-term debt.
Capital employed = non-current liabilities + equity (share capital + retained profits).

Why high or low is not always good

  • Very high stock turnover could mean great efficiency – but also the risk of stock-outs.
  • Lower debtor days improves cash flow – but stricter credit terms might lose customers.
  • Higher creditor days helps liquidity – but may damage relationships with suppliers.
  • Higher gearing boosts potential returns – but increases financial risk if interest rates rise.

Key formulas (HL)

Stock turnover (times)
stock turnover = cost of sales ÷ average stock
average stock = (opening stock + closing stock) ÷ 2
Debtor days
debtor days = (debtors × 365) ÷ sales revenue
Creditor days
creditor days = (creditors × 365) ÷ cost of sales
Gearing ratio (%)
gearing = (non-current liabilities ÷ capital employed) × 100
Rule of thumb: gearing above about 50% is usually considered highly geared; below 50% is low-geared.

Quick check – concept check

1. Which ratio compares non-current liabilities with capital employed?

2. A higher creditor days figure usually suggests that the business is:

3. Which ratio would be most relevant for a bank deciding if a firm can safely take on more long-term debt?

Insolvency, bankruptcy & liquidation

These HL terms often appear in data-response questions when a business is struggling financially.

HL Key definitions

Core definitions

Insolvency – when a business cannot meet its financial obligations because its liabilities are greater than its assets or it cannot pay debts as they fall due.
Bankruptcy – when an individual, sole trader or partnership is declared legally unable to pay debts by a court.
Liquidation – the process of dissolving a company by selling its assets to repay creditors.
Administration – a legal process that gives a company temporary protection from creditors while administrators attempt to rescue or restructure it.

How ratios link to insolvency risk

  • Very slow stock turnover may mean too much cash is tied up in inventory.
  • Very high debtor days suggests poor credit control and cash-flow problems.
  • Very high gearing means more interest to pay – dangerous if profits fall or interest rates rise.
  • If these problems persist, the business may become insolvent and could be forced into liquidation.

Quick check – insolvency language

1. Which statement best describes insolvency?

2. Bankruptcy applies specifically to:

Practice – Calculate the 3.6 ratios

Use the data for each business to calculate stock turnover (times), debtor days, creditor days and gearing.

Practice 3 full sets

How to answer

Enter your answers to 1 decimal place. Don’t type the % sign for gearing. A small margin of error is allowed.

Scenario – BrightTech Ltd (electronics manufacturer)

For the year ended 31 December: sales revenue = $2 000 000; cost of sales = $1 200 000; opening stock = $150 000, closing stock = $210 000; debtors = $260 000; creditors = $180 000; non-current liabilities = $900 000; equity = $1 100 000.

Ratio Your answer
Stock turnover (times per year)
Debtor days (days)
Creditor days (days)
Gearing ratio (%)

Hint: capital employed = non-current liabilities + equity.

Scenario – FreshBites Foods (prepared meals)

For the year ended 30 June: sales revenue = $1 500 000; cost of sales = $900 000; opening stock = $90 000, closing stock = $110 000; debtors = $135 000; creditors = $75 000; non-current liabilities = $600 000; equity = $900 000.

Ratio Your answer
Stock turnover (times per year)
Debtor days (days)
Creditor days (days)
Gearing ratio (%)

Is FreshBites more or less highly geared than BrightTech?

Scenario – UrbanWheels Bike Hire

For the year ended 31 August: sales revenue = $800 000; cost of sales = $460 000; opening stock = $50 000, closing stock = $40 000; debtors = $95 000; creditors = $110 000; non-current liabilities = $350 000; equity = $250 000.

Ratio Your answer
Stock turnover (times per year)
Debtor days (days)
Creditor days (days)
Gearing ratio (%)

UrbanWheels is the only highly geared business in this set. Think about why that might be risky.

Practice – Interpreting ratio results

Use your knowledge of 3.6 to choose the best interpretation for each situation.

AO2–AO4 MC questions

Multiple-choice interpretations

1. BrightTech Ltd has a gearing ratio of 45%. Which interpretation is most accurate?

2. UrbanWheels’ creditor days (87 days) are much higher than its debtor days (43 days). What does this suggest?

3. FreshBites improves its stock turnover from 9 times to 11 times per year, without stock-outs. What is the most likely impact?

4. A firm has debtor days of 85 and creditor days of 25. Which strategy would most directly improve its cash-flow position?

5. Which change would reduce a firm’s gearing ratio?

Flashcard studio – 3.6 vocab

Flip through the key terms for efficiency ratios and financial distress.

Recall Key terms
Stock turnover
The average number of times per year that stock is bought in and sold, calculated as cost of sales ÷ average stock.
Card 1 of ?

Deck

Click a term in the list to jump straight to that card.

End-of-topic quiz – 3.6 ratios (20 Qs)

Questions increase in difficulty from simple recall to interpretation and evaluation.

Quiz 20 questions