# Stock Turnover, Gearing & Debt Service Coverage Ratios
## 1. Stock Turnover Ratio
Helps detect excessive inventory build-up.
$$\text{Stock Turnover} = \frac{\text{Cost of Sales}}{\text{Average Inventory}} \quad \text{or} \quad \frac{\text{Turnover}}{\text{Average Inventory}}$$
Interpretation:
- An increasing Stock Turnover figure or one much larger than the industry average may indicate poor stock management (e.g., stock-outs, panic ordering).
- A very low ratio implies idle inventory and locked-up working capital.
## 2. Gearing Ratio
Indicates how much of the business is funded by borrowing.
$$\text{Gearing} = \frac{\text{Borrowings (all long-term debts including normal overdraft)}}{\text{Net Assets or Shareholders' Funds}}$$
Interpretation:
- Higher gearing → higher risk (interest and repayment are not optional like dividends).
- BUT, gearing can be sound if cash flows are strong and predictable.
## 3. Debt Service Coverage Ratio (DSCR)
Indicates the firm's capacity to service a particular level of debt (interest + principal).
$$DSCR = \frac{\text{Earnings available for Debt Service}}{\text{Interest + Installment}}$$
Key Insights:
- High-credit-rating firms target DSCR > 2 throughout the loan life.
- High DSCR ⇒ firm borrows at most competitive rates.
- Lenders use this ratio to judge ability to pay current interest and installments.