# Stock Turnover, Gearing & Debt Service Coverage Ratios

## 1. Stock Turnover Ratio

Helps detect whether there is too much inventory build-up.

Stock Turnover = Cost of Sales / Average Inventory

Stock Turnover = Turnover / Average Inventory

### Interpretation

An increasing stock turnover figure, or one much larger than the industry average, may indicate poor stock management (e.g., stock-outs, lost sales).
A low / falling figure indicates slow-moving inventory or obsolescence.

## 2. Gearing Ratio (Capital Gearing)

Measures the proportion of fixed-cost-bearing capital (debt + preference shares) to equity in the capital structure.

Capital Gearing Ratio = (Preference Share Capital + Debentures + Long-term Loans) / (Equity Share Capital + Reserves and Surplus)

## 3. Debt Service Coverage Ratio (DSCR)

Measures the firm's ability to service its debt obligations (interest + principal repayment).

DSCR = (Profit after Tax + Depreciation + Interest on Loan) / (Interest + Loan Instalment)

Worked example

### Example 1

Stock Turnover Example: Cost of Sales Rs. 60 lakh; Average Inventory Rs. 10 lakh.

Stock Turnover = 60/10 = 6 times (industry avg = 4). The higher-than-industry figure may signal stock-outs hurting sales.

### Example 2

DSCR Example: PAT Rs. 20 lakh, Depreciation Rs. 5 lakh, Interest Rs. 5 lakh, Loan Instalment Rs. 10 lakh.

DSCR = (20 + 5 + 5) / (5 + 10) = 30/15 = 2 — comfortable for the lender.

⚠️ Common exam mistakes

Interpreting a 'high' stock turnover as always good — it can also signal stock-outs and lost sales
Mixing up gearing ratio (capital structure) with leverage ratios (impact on EPS)
Forgetting to add back depreciation and interest in the DSCR numerator (since they are non-cash / pre-debt-service items)
Using only interest in the DSCR denominator instead of interest + loan instalment

Reference:

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