Analyzing Profitability –
From the textbook – Financial Analysis with Microsoft Excel
Read Chapter 3
Review PPT Chapter 3. ***ATTACHED
Using your financial statements from Southwest Airlines in Week 2, calculate the following ratios : ***ATTACHED (Professor comments to fix it: For your internet exercise, you need to follow the rules for Common Sized statements – also referred to as a vertical analysis. You need to make the sales = to 100% and it will be the denominator to everything on the income statement. Total Assets will be the denominator on the balance sheet.)
Gross Profit Margin, Operating Profit Margin, Current Ratio,
From the Red Company Software Materials –
Drilling down into the Dupont Analysis
Read Red Company Chapter 4 pages 35-57. ***ATTACHED
Watch the videos at the Red Company website on the Dupont Analysis (04A, 04B, 04C)
URL: https://www.youtube.com/watch?v=qRBHfpyTDU8
Complete Homework EX 4-1 through 4-10
Chapter 3
Financial Statement Analysis Tools
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analysis Tools Covered in this Chapter
In this chapter will see:
How to calculate many financial ratios
How to use financial ratios to make predictions about potential bankruptcy
How to calculate the economic profit (as opposed to net income) that a firm earned in a period
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Financial Ratios
Financial ratios are simply comparisons of two financial statement items
These comparisons help us to draw conclusions about the financial health of the firm that aren’t immediately obvious by looking at the raw values (e.g., net income may be positive, but what matters is how large it is relative to sales, assets, or equity)
We will calculate five categories of ratios:
Liquidity ratios
Efficiency ratios
Leverage ratios
Coverage ratios
Profitability ratios
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Liquidity Ratios
Liquidity ratios describe the ability of a firm to meets its short-term obligations by comparing current assets to current liabilities
Current assets will be converted to cash which will then be used to retire current liabilities
For both ratios, higher values are indicative of a higher probability of being able to pay off short-term debts
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Efficiency Ratios
Efficiency ratios, also called asset management ratios, provide information about how well the company is using its assets to generate sales
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Leverage Ratios (1 of 2)
Leverage ratios describe the degree to which the firm uses debt in its capital structure
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Leverage Ratios (2 of 2)
Generally, lower leverage ratios are preferred though a reasonable amount of debt is usually considered to be a good thing
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Coverage Ratios
Coverage ratios describe the quantity of funds available to “cover” certain expenses, particularly interest expense (though this is not the only one)
We generally prefer higher coverage ratios as that indicates a level of debt that is easy for the firm to service
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Profitability Ratios (1 of 2)
Profitability ratios measure how profitable a firm is relative to sales, total assets, or equity
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Profitability Ratios (2 of 2)
Without exception, higher profitability ratios are preferred over lower ones
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
10
E P I’s Financial Ratios
The image to the right shows the calculations of all financial ratios that we discussed
These values were calculated using the financial statements given in Chapter 2
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DuPont Analysis
DuPont analysis refers to a method of decomposing the return on equity into its components to better understand the R O E and why it may have changed (or why it is different than that of some other firm)
There are two versions of DuPont analysis:
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using Financial Ratios
Financial ratios can be analyzed in three ways:
Trend Analysis
Comparing to Industry Averages
Compared to Company Goals and Debt Covenants
Additionally, ratios can be used in valuation analysis and for financial distress prediction
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Financial Distress Prediction (Z-Scores)
In 19 68, Edward Altman first used discriminant analysis to classify firms into one of three categories: bankruptcy predicted, possible bankruptcy, and no financial distress
Today, this model would be considered to be a “machine learning” model alongside other classification methods (e.g., k-means or support vector machines)
We covered two Z-Score models:
The Original Z-Score Model
The Z-Score Model for Private Firms
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Original Z-Score Model
The original Z-Score model was for publicly traded firms:
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + X5
where
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Z-Score Model for Private Firms
Altman also estimated a model for privately held firms to allow for the fact that you cannot calculate the market value of equity for a private firm
This model is very similar, but the coefficients changed (note that X4 has been redefined):
Z = 0.717X1 + 0.847X2 + 3.107X3 + 0.420X4 + 0.998X5
where
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Economic Profit Measures of Performance
Economic profit is the profit earned in excess of the firm’s costs, including its implicit opportunity costs (primarily its cost of equity, which is ignored by accounting profit)
Definition of Economic Profit:
Note that economic profit is often referred to as Economic Value Added (E V A), which is a trademark of Stern Stewart and Company
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Current Assets
Current Ratio
Current Liabilities
=
Current AssetsInventories
Quick Ratio
Current Liabilities
–
=
Cost of Goods Sold
Inventory Turnover
Inventory
=
Credit Sales
Accounts Receivable Turnover
Accounts Receivable
=
Accounts Receivable
Average Collection Period
Credit Sales
360
=
Sales
Fixed Asset Turnover
Net Fixed Assets
=
Sales
Total Asset Turnover
Total Assets
=
Total Liabilities
Total Debt Ratio
Total Assets
=
Long-term Debt
Long-term Debt Ratio
Total Assets
=
Long-term Debt
LTD to Total Capitalization
Long-term DebtTotal Equity
=
+
Total Liabilities
Debt to Equity
Total Equity
=
Long-term Debt
LTD to Equity
Total Equity
=
EBIT
Times Interest Earned
Interest Expense
=
EBITNoncash Expenses
Cash Coverage Ratio
Interest Expense
+
=
Gross Profit
Gross Profit Margin
Sales
=
Net Operating Profit
Operating Profit Margin
Sales
=
Net Income
Net Profit Margin
Sales
=
Net Income
Return on Assets (ROA)
Total Assets
=
Net Income
Return on Equity (ROE)
Total Equity
=
Net Income
Return on Common Equity
Common Equity
=
Net IncomeSalesTotal Assets
DuPont ROE
SalesTotal AssetsTotal Equity
=´´
EBITEBTNet IncomeSalesTotal Assets
Extended DuPont ROE
SalesEBITEBTTotal AssetsTotal Equity
=´´´´
1
2
3
4
5
Total Assets
Retained EarningsTotal Assets
EBITTotal Assets
Market Value of EquityBook Value of Liab
ilities
SalesTotal Assets
Net WorkingCapital
X
X
X
X
X
=
=
=
=
=
1.8102.675
Bankruptcy
Predicted
Gray ZoneNo Financial
Distress
1
2
3
4
5
Total Assets
Retained EarningsTotal Assets
EBITTotal Assets
Book Value of EquityBook Value of Liabil
ities
SalesTotal Assets
Net WorkingCapital
X
X
X
X
X
=
=
=
=
=
1.212.90
Bankruptcy
Predicted
Gray ZoneNo Financial
Distress
Economic ProfitNOPATAfter-tax Cost of Op
erating Capital
NOPAT(Total Net Operating CapitalWACC)
=-
=-´
>Red Company Homework
numbers only with
7
% of net sales .20%
0%
0%
22.50% or selling, general and administrative expense) helped to increase the operating earnings and net earnings as a % of Net Sales from 2016 to 2017 2016 % of net sales % of net sales 14.17% or equity finance more of Toro’s Total assets in 2017?
liabilities 2017 2016 % of net sales % of net sales 2017 2016 % of net sales % of net sales Sold
Expense
0.25 52,100 $0.40 2020 2019 58,664 136,807 467,507 453,591 Big Rock Candy Mountain Mining Co. 100.00% – – Net Change in Cash Balance 5,779.00 RED COMPANY 35
Chapter 4
Drilling Down Into the DuPont Analysis
Profitability – Efficiency – Leverage
To begin this chapter, open the Red Company model 1-Red Company 15e if it is not already open .7-DPont. tab
.Reset the Model.
In the last chapter, you learned how the Return on Equity % is driven by:
Net Profit Margin % Profitability
Total Assets Turnover Ratio Efficiency
Assets-to-Equity Ratio Leverage
In this chapter, you will “drill down” into each of these three elements of Return on Equity %. You P R O F I T A B I L I T Y I N D I C A T O R S
Profitability is the ability of a company to have some number of cents left over from each $1 of Net .8-Prof. tab
Gross Profit Margin %
The Gross Profit Margin % measures how many cents of each $1 of Net Sales are left after 1-IS tab
The 43.00% is the Gross Profit percent in the % of Net Sales column. 36 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
Look at RC’s Income Statement and observe that the 43.00 cents of Gross Profit must cover:
Selling & General Expenses, and
Depreciation Expense, and
Interest Expense, and
Provision for Income Taxes, and
hopefully still have a few cents left over for Net Income.
.8-Prof. tab Observe the up-arrow after Gross Profit Margin %—indicating that a higher value is always The Gross Profit Margin % is an important Profitability measure for merchandising and manufacturing Inventory purchasing
Production efficiencies
Product innovation
Product marketing
Product pricing
In summary, Gross Profit Margin % shows how many cents of each $1 of Net Sales is left after Operating Profit Margin %
The Operating Profit Margin % measures how many cents of each $1 of Net Sales are left after
Annual Report Project Companies
Look at the Gross Profit Margin % for the ARP companies.
Which company has the highest Gross Profit Margin %?
_ ____________________________
Which company has the lowest Gross Profit Margin%?
_____________________________
For which of the companies does the Gross Profit Margin % not apply?
_____________________________ Why does the Gross Profit Margin% not apply to certain companies?
_____________________________________________________________________
As you can see from the ARP companies, the Gross Profit Margin % will vary significantly Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 37
1-IS tab The 12.33% is the Operating Income percent in the % of Net Sales column.
Observe that on RC’s Income Statement there are two operating expense line items, Selling & The Operating Profit Margin % measures how many cents per $1 of Net Sales is generated from .8-Prof. tab Observe the up-arrow after Operating Profit Margin %—indicating that a higher value is always In summary, Operating Profit Margin % measures the operating profitability of a company.
Net Profit Margin %
The Net Profit Margin % ratio shown on the .8-Prof. tab is a repeat of the Net Profit Margin % ratio
shown at the top of the .7-DPont. tab. For a discussion of Net Profit Margin %, see Pg 26. The
Net Profit Margin % is repeated on the .8-Prof. tab so that you can see all three Profitability ratios Let’s make a change to the Red Company model and see how the change impacts the three Annual Report Project Companies Look at the Operating Profit Margin % for the ARP companies.
Which company has the highest Operating Profit Margin %?
_____________________________ Which company has the lowest Operating Profit Margin%?
_____________________________ As you can see from the ARP companies, the Operating Profit Margin % will vary a lot from 38 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
1-IS tab Enter 55 in Cost of Goods Sold Percent Tab key
.8-Prof. tab All three of the Profitability ratios increased as a result of decreasing the number of cents Cost of The Gross Profit Margin % increased from 43.00% to 45.00%. This is exactly the change The Operating Profit Margin % increased from 12.33% to 14.33%. This shows that the The Net Profit Margin % increased from 7.71% to 9.07%. This is an increase, but the 1-IS tab By looking at the Income Statement, you can see a 2.00 percentage point increase in Gross Profit, Provision for Income Taxes (an expense) is the reason that all of the 2.00 additional cents did not cents (2.00 – .64) make it down to Net Income.
As you have seen, a decrease in the Cost of Goods Sold Percent has a very favorable impact on Purchase products more effectively.
Produce products more efficiently.
Market products more effectively, which results in the ability to increase prices.
Let’s examine the impact an increase in sales would have on the three Profitability ratios.
1-IS tab Enter 2,500,000 in Net Sales Tab key
.8-Prof. tab Two of the three Profitability ratios increased as a result of increasing Net Sales by $400,000. Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 39
The Gross Profit Margin % did not change. It did not change because the Cost of Goods The Operating Profit Margin % increased from 12.33% to 14.60%, an increase of 2.27 1-IS tab On the Income Statement, observe that Operating Income in the % of Net Sales column is .8-Prof. tab The Net Profit Margin % increased from 7.71% to 9.36%. This increase of 1.65 Note: The discussion in this box is not necessary for your understanding of the Gross Profit Cost of Goods Sold is programmed in the Red Company model to be a totally variable For a merchandising company, Cost of Goods Sold is normally a totally variable cost. For Note: The discussion in this box is not necessary for your understanding of the Operating Profit Selling & General Expenses (S&G Expenses) are programmed in the Red Company model Depreciation Expense is programmed in the Red Company model as a fixed cost. 40 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
In summary, the three Profitability ratios provide insight into how much of each $1 of Net Sales E F F I C I E N C Y I N D I C A T O R S
.7-DPont. tab Efficiency, as used in DuPont Analysis, is the measurement of how effective a company is at By looking at the Total Assets Turnover Ratio, you can see that the denominator of the ratio is Accounts Receivable
Inventory
Fixed Assets (property, plant, and equipment)
Next you will be introduced to a new set of financial statement analysis tools that will measure how
.9-Eff. tab
Annual Report Project Companies For the ARP companies, observe the Profitability pattern that is shown by their: Gross Profit Does the company with the highest Gross Profit Margin % also have the highest
Operating Profit Margin % and Net Profit Margin %? ____ Yes ____ No Do the two companies in the same industry have similar Gross Profit Margin %’s?
____ Yes ____ No (enter an X in one box)
Does the company with the lowest Operating Profit Margin % also have the lowest Net
Profit Margin %? ____ Yes ____ No (enter an X in one box)
Read the box titled Discussion of Profitability.
As you can see from the ARP companies, Profitability will vary a lot from company to Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 41
Accounts Receivable Turnover Ratio – Number of Days’ Sales in Receivables
To help you understand these two Efficiency Indicators for Accounts Receivable, let’s assume that GPC will collect their Accounts Receivable balance 365 times each year.
At the end of each day, the balance in Accounts Receivable will be $100. The $100 Total sales for the year will be $36,500 ($100 sales per day x 365 days in a year).
The Accounts Receivable Turnover Ratio measures how many times per year a company collects Number of Days’ Sales in Receivables measures how many days’ sales are in a company’s Using the calculation formula shown on the .9-Eff. tab and the data for GPC, we can verify our Net Sales $36,500 Average Accounts Receivable, net ($100 + $100) / 2 Using the calculation formula shown on the .9-Eff. tab and GPC’s Accounts Receivable 365 Days in a Year 365 Accounts Receivable Turnover Ratio 365.00
While no company would have the sales and cash collection pattern of GPC, hopefully the use of 42 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
Look at the .9-Eff. tab and observe RC’s values for these two Accounts Receivable Efficiency RC’s Accounts Receivable Turnover Ratio of 8.69 indicates that RC collects its average Accounts RC’s Number of Days’ Sales in Receivables value of 42.00 days indicates that when RC makes a The current state of the economy.
The normal credit terms for the industry in which the company operates.
The actual credit terms of the company.
The credit worthiness of the customers sold to on credit.
The Accounts Receivable collection efforts of the company.
Observe the up-arrow after Accounts Receivable Turnover Ratio—indicating that a higher value While the discussion above about the Accounts Receivable up and down arrows is normally true, it If credit terms are too restrictive (too few days before payment is expected and/or giving If credit terms are too loose (too many days before payment is expected and/or granting 1 Selling to customers on credit does not mean that the customer used a credit card for the transaction. Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 43
The following are calculation notes related to the Accounts Receivable Efficiency Indicators:
Calculation of Average Accounts Receivable, net for the year 2021:
Dec 31, 2020 Dec 31, 2021 Average Accounts
( Accounts Receivable, net + Accounts Receivable, net ) / 2 = Receivable, net for 2021
( $246,000 + $237,288 ) / 2 = $241,644
Note: The Accounts Receivable amounts come from RC’s Balance Sheets 2-BS tab. The Average Accounts Receivable, net was rounded to a whole number—that is, to 0 Days in a Year will always be 365 days.
The preferred amount to use for the numerator in the Accounts Receivable Turnover Ratio There is an alternative calculation method for Number of Days’ Sales in Receivables. This Average Accounts Receivable, net ($246,000 + $237,288) / 2 = $241,644 Average Daily Net Sales $2,100,000 / 365 days = $5,753
In summary, the Accounts Receivable Turnover Ratio and the Number of Days’ Sales in Annual Report Project Companies Look at the Accounts Receivable Turnover Ratio and the Number of Days’ Sales in Which company collects its Accounts Receivable the most times per year (has the
highest Accounts Receivable Turnover Ratio)? _____________________________
Which company has the lowest Number of Days’ Sales in Receivables (excluding any
company with zero Accounts Receivable)? _____________________________
As you can see from the ARP companies, these indicators will vary a lot from company to 44 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
Inventory Turnover Ratio – Number of Days’ Sales in Inventory
.9-Eff. tab Look at the .9-Eff. tab and observe how the Inventory Turnover Ratio is calculated. The Inventory Purchase the item from a vendor or produce the item, and
Hold the item in inventory for 3 months (12 months / 4.00), and
Sell the item to a customer.
Look at the .9-Eff. tab and observe how the Number of Days’ Sales in Inventory is calculated. RC’s Inventory Turnover Ratio of 3.84 indicates that for the average item in inventory, RC A company’s Inventory Turnover Ratio and Number of Days’ Sales in Inventory will be impacted by Demand for the company’s products, and the ability to predict that demand.
Reliability and consistency of the company’s suppliers.
Production efficiency, if the company is a manufacturer.
Complexity of the product being produced, if the company is a manufacturer.
Overall efficiency of the company’s inventory control systems.
Observe the up-arrow after Inventory Turnover Ratio—indicating that a higher value is better. While the discussion above about the Inventory up and down arrows is normally true, it is important If too little inventory is kept on-hand, customer service goes down as shipments are If too much inventory is kept on-hand, financial performance goes down as a result of the Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 45
The following are calculation notes related to the Inventory Efficiency Indicators:
Calculation of Average Inventory for the year 2021:
Dec 31, 2020 Dec 31, 2021
( Inventory + Inventory ) / 2 = Average Inventory for 2021
( $280,000 + $343,096 ) / 2 = $311,548
Note: The Inventory amounts come from RC’s Balance Sheets 2-BS tab. The two Inventory Average Inventory was rounded to a whole number.
Days in a Year will always be 365 days. There is an alternative calculation method for Number of Days’ Sales in Inventory. This Average Inventory ($280,000 + $343,096) / 2 = $311,548 Average Daily Cost of Goods Sold $1,197,000 / 365 days = $3,279
In summary, the Inventory Turnover Ratio and the Number of Days’ Sales in Inventory provide .9-Eff. tab Look at the Inventory Turnover Ratio and the Number of Days’ Sales in Inventory for the Which company turns-over its Inventory the most times per year (has the highest
Inventory Turnover Ratio)? _____________________________
Which company has the lowest Number of Days’ Sales in Inventory?
_____________________________ The Inventory Efficiency Indicators do not apply to which company?
_____________________________ As you can see from the ARP companies, these indicators will vary a lot from company to Observe that a service company does not have inventory 46 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
Accounts Payable Turnover Ratio – Number of Days’ Purchases in Accounts Payable
At the start of this section on Efficiency Indicators, there was a listing of the three major categories The efficient management of Accounts Payable can delay when the payment of cash is Number of Days’ Purchases in Accounts Payable is needed for the Cash-to-Cash Cycle Look at the .9-Eff. tab and observe how the Accounts Payable Turnover Ratio is calculated. The Look at the .9-Eff. tab and observe how the Number of Days’ Purchases in Accounts Payable is RC’s Accounts Payable Turnover Ratio of 7.60 indicates that RC pays its average Accounts Observe the down-arrow after the Accounts Payable Turnover Ratio—indicating that a lower While the discussion above about the Accounts Payable up and down arrows is normally true, it is If payments to vendors are delayed for too many days, the company’s relationships with If payments to vendors are made too quickly, the company does not get the benefit of Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 47
The following are calculation notes related to the Accounts Payable indicators:
Calculation of Average Accounts Payable for the year 2021:
Dec 31, 2020 Dec 31, 2021
( Accounts Payable + Accounts Payable ) / 2 = Average Accounts Payable for 2021
( $140,000 + $174,827 ) / 2 = $157,414
Note: The Accounts Payable amounts come from RC’s Balance Sheets 2-BS tab. The two Average Accounts Payable was rounded to a whole number.
Days in a Year will always be 365 days. There is an alternative calculation method for Number of Days’ Purchases in Accounts Average Accounts Payable ($140,000 + $174,827) / 2 = $157,414 Average Daily Cost of Goods Sold $1,197,000 / 365 days = $3,279 In summary, the Accounts Payable Turnover Ratio and the Number of Days’ Purchases in .9-Eff. tab Look at the Accounts Payable Turnover Ratio and the Number of Days’ Purchases in Which company pays its average Accounts Payable balance the least times per year
(has the lowest Accounts Payable Turnover Ratio)? ____________________________
Which company has the highest Number of Days’ Purchases in A/P?
_____________________________ 48 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
Cash-to-Cash Cycle
To better understand the Cash-to-Cash Cycle indicator, let’s follow the flow of cash through a 1. The company orders and receives inventory. At this point the company does not pay out 2. Cash is paid out to the vendor 48 days after the purchase of the inventory.
3. The inventory sits on the company’s shelf for some period of time—let’s say the inventory 4. After 95 days the inventory is sold to a customer. At this point the company does not 5. Cash is received in from the customer 42 days after the sale; thus completing the The Cash-to-Cash Cycle indicator combines the Number of Days’ indicators for Inventory, Accounts By looking at the Cash-to-Cash Cycle indicator, you can see what can be done to reduce the time You can decrease the number of days the inventory sits on the shelf before being sold You can increase the number of days between when inventory is purchased from a You can decrease the number of days between when the inventory is sold to a Observe the down-arrow after Cash-to-Cash Cycle—indicating that a lower value is always If RC’s management was to make some positive operational changes in the areas of: Inventory Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 49
First, let’s see what the effects would be of reducing by 10 the number of days Inventory sits on the 2-BS tab
.Reset the Model. Enter 85 in Number of Days’ Sales in Inventory Tab key
Observe the following positive changes that result from holding Inventory for 10 fewer days:
Inventory decreased from $343,096 to $277,507—a decrease of $65,589.
Cash increased from $149,783 to $215,372—an increase of $65,589.
.9-Eff. tab The Inventory Turnover Ratio increased from 3.84 times to 4.29 times—the up-arrow The Number of Days’ Sales in Inventory decreased from 95.05 days to 85.08 days—the The Cash-to-Cash Days decreased from 89.02 to 79.05 days—the down-arrow after Next let’s see what the effects would be of increasing by 7 the number of days taken to pay 2-BS tab Enter 55 in Number of Days’ Purchases in A/P Tab key
Observe the following positive changes that result from increasing by 7 days the time taken to pay Accounts Payable increase from $174,827 to $220,740—an increase of $45,913.
Cash increased from $215,372 to $261,285—an increase of $45,913. The combined Note: Given that you entered 85 into the Number of Days’ Sales in Inventory input variable, you 50 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
.9-Eff. tab The Accounts Payable Turnover Ratio decreased from 7.60 times to 6.64 times—the The Number of Days’ Purchases in Accounts Payable increased from 48.03 days to The Cash-to-Cash Days decreased by about 7 more days—the down-arrow after this Next let’s see what the effects would be of decreasing by 6 the number of days it takes to collect 2-BS tab Enter 36 in Number of Days’ Sales in A/R Tab key
Observe the following positive changes that result from decreasing by 6 days the time taken to Accounts Receivable decreased from $237,288 to $168,247—a decrease of $69,041.
Cash increased from $261,285 to $330,326—an increase of $69,041. The combined .9-Eff. tab The Accounts Receivable Turnover Ratio increased from 8.69 times to 10.14 times— The Number of Days’ Sales in Accounts Receivable decreased from 42.00 days to The Cash-to-Cash Days decreased by 6 more days—the down-arrow after this As a result of the significant decrease in its Cash-to-Cash Days, RC now has excess cash. RC 2-BS tab Enter –115,000 in New Borrowing (Pay Off) on Jan. 1 Enter 2,400 in Number of Shares of Stock bought back Tab key Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 51
RC has now used the excess cash to reduce the Note Payable Long-Term balance from $300,000 .7-DPont. tab Observe that the Total Assets Turnover Ratio in the DuPont Analysis has increased from 1.82 to And finally, look at the Return on Equity % and observe the significant change from 27.34% up to .9-Eff. tab Next you will learn one last Efficiency Indicator. This indicator will be for assets that are not part of .Reset the Model. Fixed Asset Turnover Ratio
The Fixed Asset Turnover Ratio is discussed separately from the other Efficiency Indicators As shown by the Fixed Asset Turnover Ratio, RC is currently generating $4.50 of Net Sales from Annual Report Project Companies Look at the Cash-to-Cash Cycle indicator for the ARP companies.
Which company has the shortest amount of time between when cash is paid out and
when cash is received in (has the lowest Cash-to-Cash Days)?
____________________________ Which company has the longest amount of time between when cash is paid out and
when cash is received in (has the highest Cash-to-Cash Days)?
_____________________________ As you can see from the ARP companies, Cash-to-Cash Days will vary a lot from company to 52 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
The following are calculation notes related to the Fixed Asset Turnover Ratio:
Calculation of Average Net Fixed Assets for the year 2021:
Dec 31, 2020 Dec 31, 2021
( Net Prop., Plant, & Equip. + Net Prop., Plant, & Equip. ) / 2 = Average Net Fixed Assets for 2021
( $440,000 + $492,500 ) / 2 = $466,250
Note: The Net Prop., Plant, & Equip. amounts come from RC’s Balance Sheets 2-BS tab. Average Net Fixed Assets was rounded to a whole number.
Many different titles are used on companies’ Balance Sheets for Fixed Assets. The most often If Accumulated Depreciation is shown on the Balance Sheet, the amounts used in the Average Let’s see the impact on this ratio if RC is able to increase Net Sales without having to purchase 1-IS tab The Fixed Asset Turnover Ratio increased significantly as a result of the numerator, Net Sales, This concludes this section on Efficiency Indicators. In this section, you added eight additional Annual Report Project Companies Look at the Fixed Asset Turnover Ratio for the ARP companies.
Which company has the highest Fixed Asset Turnover Ratio?
____________________________ Which company has the lowest Fixed Asset Turnover Ratio?
_____________________________ For the ARP companies, review all of their Efficiency Indicators and then read the box titled As you can see from the ARP companies, the Efficiency Indicators will vary a lot from Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 53
L E V E R A G E I N D I C A T O R S
.7-DPont. tab Leverage, as used in the DuPont Analysis, is the measurement of how the stockholders’ Before leaving the .7-DPont. tab, observe the following about the Assets-to-Equity Ratio:
As calculated and used in the DuPont Analysis, this ratio measures average Leverage for As currently shown on the .7-DPont. tab, RC’s Assets-to-Equity Ratio has a value of 1.95 to .10-Lev. tab
On the .10-Lev. tab, you see two additional Leverage Indicators, the Debt % and the Debt-to- Assets-to-Equity Ratio
Debt %
Debt-to-Equity Ratio
are often used interchangeably in the financial press when discussing a company’s leverage.
Debt % The Debt % shows the percent of each $1 of Total Assets that is financed with debt. RC’s Debt % 54 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
The Debt % is measuring the amount of financial leverage a company has at the end of the 2-BS tab Observe where the dollar amount for Total Liabilities and the dollar amount for Total Assets .10-Lev. tab Like the DuPont Analysis Leverage indicator, Assets-to-Equity Ratio, the Debt % has up-down- Debt-to-Equity Ratio
The Debt-to-Equity Ratio shows the amount of Total Liabilities (debt) for each $1 of Total The Debt-to-Equity Ratio is measuring the amount of financial leverage a company has at the end 2-BS tab Observe where the dollar amount for Total Liabilities and the dollar amount for Total Stockholders’ .10-Lev. tab Like the two other Leverage indicators, Assets-to-Equity Ratio and Debt %, the Debt-to-Equity Observe that the Debt % and the Debt-to-Equity Ratio are each indicating the same thing—just in a A Debt % of 47.42% indicates that RC has 47.42 cents of debt and 52.58 cents of A Debt-to-Equity Ratio of .90 shows that RC has $.90 of debt for each $1.00 of equity— Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 55
Let’s significantly increase RC’s financial leverage and see if the Debt % and the Debt-to-Equity 2-BS tab Enter 250,000 in New Borrowing (Pay Off) on Jan. 1
Enter 5,000 in Number of Shares of Stock bought back Tab key
As a result of the above changes, Notes Payable Long-Term has increased from $300,000 to .10-Lev. tab Observe that the Debt % and the Debt-to-Equity Ratio still provide a consistent message:
A Debt % of 68.54% indicates that RC has 68.54 cents of debt and 31.46 cents of A Debt-to-Equity Ratio of 2.18 shows that RC has $2.18 of debt for each $1.00 of In summary, the three Leverage indicators:
Assets-to-Equity Ratio Debt %
Debt-to-Equity Ratio are all measuring the same thing, Leverage.
Annual Report Project Companies Look at the Debt % and the Debt-to-Equity Ratio for the ARP companies.
Based on the Debt %, which company has the highest financial leverage (the highest
Debt %)? ____________________________
Which company has the lowest financial leverage (the lowest Debt % and the lowest
Debt-to-Equity Ratio)? ____________________________
For any of the companies, do shareholders have a larger claim to assets than the
creditors? ____ Yes ____ No (enter an X in one box)
Read the discussion about these two Leverage indicators in the box titled Discussion of As you can see from the ARP companies, the blending of debt and equity varies a lot from 56 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
I N T E R E S T C O V E RA G E
.10-Lev. tab The Times Interest Earned Ratio is included on the .10-Lev. tab with the Debt % and the Debt-to- The Times Interest Earned Ratio measures a company’s ability to pay the interest on its debt. This The amounts needed to calculate this ratio are shown on the Income Statement.
1-IS tab The numerator of the Times Interest Earned Ratio is earnings before interest expense and before Net Income …………………………………… $161,840
plus Interest Expense ……………………. 21,000
plus Provision for Income Taxes ……… 76,160
Earnings before interest and taxes … $259,000
Income taxes are paid on income after interest has been deducted; therefore the earnings Let us see what the Income Statement and the Times Interest Earned Ratio would look like if RC Enter 1,248,938 in Net Sales
Enter 60 in Cost of Goods Sold Percent Tab key
At this greatly reduced level of sales and increased cost of goods sold percent, RC has just .10-Lev. tab Observe that the Times Interest Earned Ratio is now equal to 1.00. RC now has available just $1 Before you made the changes to Net Sales and the Cost of Goods Sold Percent, the Times Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 57
Observe the up-arrow after this ratios name—indicating that a higher value is always better. A In summary, the Times Interest Earned Ratio provides information about a company’s ability to pay Annual Report Project Companies Look at the Times Interest Earned Ratios for the ARP companies.
Which company has the highest (best) Times Interest Earned Ratio?
____________________________ Which company has the lowest Times Interest Earned Ratio?
____________________________ Read the discussion about this ratio in the box titled Discussion of Financial Leverage and As you can see from the ARP companies, interest coverage varies a lot from company to 58 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
Chapter 4 Homework
In these exercises, you will be calculating financial statement analysis indicators that provide For these exercises, you will be using the financial statements of The Toro Company. Use Toro’s Exercise 4-1 Gross Profit Margin % (a driver of Profitability)
A. When calculating the 2017 Gross Profit Margin %, which financial statement line items are 1. Numerator? – The line item name on Toro’s financial statement and the $ amount.
2. Denominator? – The line item name on Toro’s financial statement and the $ amount.
B. Calculate Toro’s Gross Profit Margin % for 2017. Round your percent answer to 2 decimal C. The Gross Profit Margin % is a(n): D. On the Answer Sheet under your answer for item B. is Toro’s 2016 Gross Profit Margin %. Exercise 4-2 Operating Profit Margin % (a driver of Profitability)
A. When calculating the 2017 Operating Profit Margin %, which financial statement line items 1. Numerator? – The line item name on Toro’s financial statement and the $ amount. B. Calculate Toro’s Operating Profit Margin % for 2017. Round your percent answer to 2 C. The Operating Profit Margin % is a(n): D. On the Answer Sheet under your answer for item B. is Toro’s 2016 Operating Profit Margin Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 59
Exercise 4-3 Accounts Receivable Turnover Ratio (a driver of Efficiency) A. When calculating the 2017 Accounts Receivable Turnover Ratio, which financial statement 1. Numerator? – The line item name on Toro’s financial statement and the $ amount. 2. Denominator? – (Note that the answers for this item are on the Answer Sheet. Just the B. Calculate Toro’s Accounts Receivable Turnover Ratio for 2017. Round Average Accounts C. The Accounts Receivable Turnover Ratio is a(n): D. On the Answer Sheet under your answer for item B. is Toro’s 2016 Accounts Receivable E. Calculate Toro’s Number of Days’ Sales in Receivables for 2017. Utilize the Turnover Ratio F. Number of Days’ Sales in Receivables is a(n): G. On the Answer Sheet under your answer for item E. is Toro’s 2016 Number of Days’ Sales Exercise 4-4 Inventory Turnover Ratio (a driver of Efficiency) A. When calculating the 2017 Inventory Turnover Ratio, which financial statement line items 1. Numerator? – The line item name on Toro’s financial statement and the $ amount. 2. Denominator? – The line item name on Toro’s financial statement and the $ amounts.
B. Calculate Toro’s Inventory Turnover Ratio for 2017. Round Average Inventory to a whole C. The Inventory Turnover Ratio is a(n): D. On the Answer Sheet under your answer for item B. is Toro’s 2016 Inventory Turnover E. Calculate Toro’s Number of Days’ Sales in Inventory for 2017. Utilize the Turnover Ratio F. Number of Days’ Sales in Inventory is a(n): G. On the Answer Sheet under your answer for item E. is Toro’s 2016 Number of Days’ Sales 60 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
Exercise 4-5 Accounts Payable Turnover Ratio A. When calculating the 2017 Accounts Payable Turnover Ratio, which financial statement line 1. Numerator? – The line item name on Toro’s financial statement and the $ amount. B. Calculate Toro’s Accounts Payable Turnover Ratio for 2017. Round Average Accounts C. The Accounts Payable Turnover Ratio is a(n): D. On the Answer Sheet under your answer for item B. is Toro’s 2016 Accounts Payable E. Calculate Toro’s Number of Days’ Purchases in Accounts Payable for 2017. Utilize the F. Number of Days’ Purchases in Accounts Payable is a(n): G. On the Answer Sheet under your answer for item E. is Toro’s 2016 Number of Days’ Exercise 4-6 Cash-to-Cash Cycle
A. On the Answer Sheet complete Toro’s Cash-to-Cash Cycle table for 2017 and 2016.
B. Utilizing your answer for item A., discuss Toro’s Cash-to-Cash Days for 2017 compared to Exercise 4-7 Fixed Asset Turnover Ratio (a driver of Efficiency)
A. When calculating the 2017 Fixed Asset Turnover Ratio, which financial statement line items 1. Numerator? – The line item name on Toro’s financial statement and the $ amount. B. Calculate Toro’s Fixed Asset Turnover Ratio for 2017. Round Average Fixed Assets to a C. The Fixed Asset Turnover Ratio is a(n): D. On the Answer Sheet under your answer for item B. is Toro’s 2016 Fixed Asset Turnover Chapter 4 – Profitability – Efficiency – Leverage RED COMPANY 61
Exercise 4-8 Debt % (an indicator of Leverage at year-end)
A. When calculating the 2017 Debt %, which financial statement line items are used for the:
1. Numerator? – (Note that the answer to this item is a schedule on which you will 2. Denominator? – The line item name on Toro’s financial statement and the $ amount. B. Calculate Toro’s Debt % for 2017. Round your final answer to 2 decimal places.
C. The Debt % is a(n): D. On the Answer Sheet under your answer for item B. is Toro’s 2016 Debt %. Based on the Exercise 4-9 Debt-to-Equity Ratio (an indicator of Leverage at year-end)
A. When calculating the 2017 Debt-to-Equity Ratio, which financial statement line items are 1. Numerator? – See the answer to Exercise 4-8 item A.1.
2. Denominator? – The line item name on Toro’s financial statement and the $ amount. B. Calculate Toro’s Debt-to-Equity Ratio for 2017. Round your final answer to 2 decimal C. The Debt-to-Equity Ratio is a(n): D. On the Answer Sheet under your answer for item B. is Toro’s 2016 Debt-to-Equity Ratio. Exercise 4-10 Times Interest Earned Ratio (an indicator of interest coverage)
A. When calculating the 2017 Times Interest Earned Ratio, which financial statement line 1. Numerator? – (Note that the answer to this item is a schedule on which you will 2. Denominator? – The line item name on Toro’s financial statement and the $ amount. B. Calculate Toro’s Times Interest Earned Ratio for 2017. Round your final answer to 2 C. The Times Interest Earned Ratio is a(n): D. On the Answer Sheet under your answer for item B. is Toro’s 2016 Times Interest Earned 62 RED COMPANY Chapter 4 – Profitability – Efficiency – Leverage
This page intentionally left blank. Profit Margin:
2
Enter your answers below
–
20
1
2016
EX2-1
% of net sales
1
Cost of
Sales
6
3
63.
4
2
Gross profit
36.70%
36.
5
3
selling, general, and admin expense
22.50%
4
operating earnings
14.17%
13.97%
5
net earnings
10.60%
9.65%
B.
Discuss which line item (
Cost of sales
2017
This helped operating earnings and net earnings as a percent of sales go up from 2016 to 2017, because the cost of sales was a little less in 2017. This helped.
EX 2-2
1
Total receivables, net
12.25%
11.79%
2
Inventories, net
22%
22.17%
3
Accounts payable
13.61%
4
Retained earnings
7.50%
7.88%
5
Total stockholders’ equity
41.31%
39.72%
B.
Did
liabilities
EX-2-3
1
Net sales
4.72%
0.05%
2 Cost of sales
4.21%
2.40%
3 Gross profit
5.28%
4.69%
4 selling, general, and admin expense 4.72%
0.62%
5 net earnings
18.89%
14.58%
B.
Coment on the percent change in gross profit from 2016 to 2017 compared to the percent change in net sales from 2016 to 2017
It is the percentage change in net sales from 2016 to 2017. Even though net sales have gone up a lot from last year compared to gross profit.
EX2-4
1 Total receivables, net
$19,808
12.13%
2 Inventories, net
$21,958
7.15%
3 Accounts payable
$37,084
21.23%
4
Retained Earnings
$54,285
11.30%
B.
Comment on the percent change in inventory from 2016 to 2017 compared to the percent change in cost of sales from 2016 to 2017
When you compare the percentage changes in inventory from 2016 to 2017 to the percentage changes in cost of sales from 2016 to 2017, you see that inventory changed more than cost of sales changed.
Internet Exercise
Big RockCandy Mountain Mining Co.
Income Statement
For the Year Ended Dec. 31,
2020
2020
2019
Sales
412,500
398,600
Cost of Goods
318,786
315,300
Gross Profit
93,714
83,300
=B5-B6
Selling and G&A Expenses
26,250
24,550
Other Expenses
1,210
1,245
Depreciation
29,800
29,652
EBIT
36,454
27,853
=B7-SUM(B8:B10)
Interest Expense
8,582
8,457
Earnings Before
Taxes
27,872
19,396
=B11-B12
Taxes
6,968
4,849
=B13*B18
Netlncome
20,904
14,547
=B13-B14
Notes:
Tax Rate
0.25
Shares
52,100
EPS
$0.40
Big Rock Candy Mountain Mining Co.
Balance Sheet
As of Dec. 31,2020
Assets
Cash
16,435
11,596
Accounts Receivable
45,896
47,404
Marketable Securities
3,656
619
Inventory
52,397
54,599
Total Current Assets
118,384
114,218
=SUM(B5:B8)
Gross Fixed Assets
436,573
397,023
Accumulated Depreciation
87,450
57,650
Net Plant & Equipment
349,123
339,373
=B10-B11
Total Assets
467,507
453,591
=B9+B12
Liabilities and Owner’s Equity
Accounts Payable
37,752
36,819
Accured Expenses
3,183
3,085
Total Current Liabilities
40,935
39,904
=SUM(B15:B16)
Long-term Debt
170,562
178,581
Total Liabilities
211,497
218,485
=B17+B18
Common Stock
58,664
Additional Paid-In-Capital
136,807
Retained Earnings
60,539
39,635
Total Shareholder’s Equity
256,010
235,106
=SUM(B20:B22)
Total Liabilities and Owner’s Equity
=B19+B23
Common Size Income Statement
For the years 2019 and 2020
Income Statement Common Size Income Statement
2020 2019 2020 2019
Sales
412,500.00
398,600.00
100.00%
Cost of Goods
318,786.00
315,300.00
77.28%
79.10%
Gross Profit
93,714.00
83,300.00
22.72%
20.90%
Depreciation
29,800.00
29,652.00
7.22%
7.44%
Selling & Admin. Expense
26,250.00
24,550.00
6.36%
6.16%
Other Operating Expense ___
1,210.00
1,245.00
0.29%
0.31%
Net Operating Income
36,454.00
27,853.00
8.84%
6.99%
Interest Expense
8,582.00
8,457.00
2.08%
2.12%
Earnings Before Taxes
27,872.00
19,396.00
6.76%
4.87%
Taxes
6,968.00
4,849.00
1.69%
1.22%
Net Income
20,904.00
14,547.00
5.07%
3.65%
New Smyrna Surf Shop
Statement of Cash Flows
For the Year 2020
Cash Flows from Operations
Net Income
120.540.00
Depreciation Expense
7,148
Change in Accounts Receivable
(11,248)
Change in Inventories
(8,276)
Change in Accounts Payable
1,589
Total Cash Flows from Operations
109,753.00
Cash Flows from Investing
Change in fixed assets
(41,704)
Total Cash Flows from Investing
S (41,704)
Cash Flows from Financing
Change in Notes Payable
(3,025)
Change in Long-Term Debt
755
Change in Common Stock
Change in Paid-In Capital
Cash Dividends
(60,000)
Total Cash Flows from Financing
(62,270.00)
Net Change in Cash Balance
5,779.00
Check answer against Balance Sheet
Beginning Cash From Balance Sheet
15,187
Ending Cash From Balance Sheet
20,966
on your computer.
will be adding thirteen new tools to your financial statement analysis tool-kit. These new tools will
enable you to analyze: Profitability, Efficiency, and Leverage.
Sales after covering all expenses. As you can see on the .7-DPont. tab, Net Profit Margin %
measures Profitability and is the first ratio in the DuPont Analysis. Below you will add two
additional Profitability ratios to your tool-kit. These two new ratios will measure Profitability at two
different points above Net Income on the Income Statement. Thus these two new ratios will
provide additional insight into what is driving the Net Profit Margin %, which is measuring
Profitability at the Net Income level on the Income Statement.
deducting Cost of Goods Sold. RC’s Gross Profit Margin % of 43.00% indicates that there are
43.00 cents of each $1 of Net Sales left after deducting 57.00 cents for Cost of Goods Sold. You
have previously seen this 43.00%.
better. A higher value would indicate that fewer pennies are being consumed by Cost of Goods
Sold and that Gross Profit is increased.
companies. For merchandisers and manufacturers, the Gross Profit Margin % measures the
combined effectiveness of:
deducting Cost of Goods Sold.
deducting operating expenses from Gross Profit. RC’s Operating Profit Margin % of 12.33%
indicates that there are 12.33 cents of each $1 of Net Sales left after deducting operating expenses
from the 43.00 cents of Gross Profit. You have previously seen this 12.33%.
depending on the company’s industry.
General Expenses and Depreciation Expense. The number of operating expense line items, and
the titles of those operating expense line items, will vary by the type of company and by how much
detail the company chooses to show on its Income Statement.
operating the business. This is a measure of operating profitability. Notice on the Income
Statement that the 12.33% is before deducting Interest Expense and before deducting Provision
for Income Taxes. Interest Expense is the result of how management chooses to finance (debt vs.
equity) not operate the company. Provision for Income Taxes (an expense) is the result of tax
rates (government policy) and Pre-Tax Income. Thus you can see that the Operating Profit Margin
%, which is a measurement before interest and taxes, is a good indicator of how profitably
management is able to operate the business.
better. A higher value would indicate a more profitable operation of the business.
together on one tab.
Profitability ratios.
company to company and industry to industry.
.Reset the Model.
Goods Sold consumes of each $1 of Net Sales:
that would be expected when Cost of Goods Sold is decreased from 57.00% to 55.00%.
Cost of Goods Sold is now consuming 2.00 fewer cents of each $1 of Net Sales; thus there
are 2.00 more cents of Gross Profit available from each $1 of Net Sales.
additional 2.00 cents of Gross Profit made it to the Operating Income level on the Income
Statement.
increase is less than the 2.00 percentage points increase in the Gross Profit Margin % and
the Operating Profit Margin %. Let’s take a look at the Income Statement to see why the
Net Profit Margin % increased less than the other two Profitability ratios.
Operating Income, and Pre-Tax Income. You can also see that Net Income as a % of Net Sales
(Net Profit Margin %) increased from 7.71% to 9.07%, an increase of only 1.36 percentage points.
make it down to Net Income. Currently Red Company’s Effective Income Tax Rate is 32%. This
means that when Pre-Tax Income increases by 2.00 cents, the Provision for Income Taxes
increases by .64 cents (2.00 cents x 32%). As a result of the .64 cents increase in taxes, only 1.36
all three of the Profitability ratios. One or more of the following favorable management actions can
cause a decrease in Cost of Goods Sold as a percent of Net Sales and an increase in profitability:
.Reset the Model.
Sold Percent stayed at 57%. The total Gross Profit dollars (the numerator) did increase,
but that increase was in the same proportion as the increase in Net Sales dollars (the
denominator); thus there was no change in the Gross Profit Margin %.
percentage points. This increase in the Operating Profit Margin % is the result of Operating
Income dollars (the numerator) increasing faster than Net Sales dollars (the denominator).
Let’s take a look at the Income Statement to see the details of why the Operating Profit
Margin % increased.
14.60% and that it was 12.33% before the $400,000 increase in Net Sales. Also observe
that Gross Profit in the % of Net Sales column is 43.00% both before and after the sales
increase. If the Gross Profit Margin % stayed the same and the Operating Profit Margin %
increased, it must mean that operating expenses decreased as a percent of Net Sales.
That is exactly what happened. Selling & General Expenses decreased from 27.22% down
to 25.50% of Net Sales. Depreciation Expense decreased from 3.45% down to 2.90% of
Net Sales. As a result of these two operating expenses decreasing as a percent of Net
Sales, the Operating Profit Margin % increased by 2.27 percentage points.
percentage points is .62 percentage points smaller than the increase in the Operating Profit
Margin %. The two non-operating expenses on RC’s Income Statement are what caused
this .62 percentage points smaller increase. Interest Expense, a non-operating item,
decreased by .16 percentage points; this helped the Net Profit Margin %. Provision for
Income Taxes, the other non-operating item, increased by .78 percentage points; this hurt
the Net Profit Margin %.
Margin %. This discussion is based on managerial accounting concepts – but there is
certainly an interplay between Financial Statement Analysis and managerial accounting.
cost. This means that Cost of Goods Sold will change by the same proportion as the
change in Net Sales (and assumes that the change in Net Sales resulted from a change in
the number of units sold and not a change in selling price).
a manufacturing company, Cost of Goods Sold is normally a mixture of variable costs and
fixed costs. Thus for most manufacturing companies, the Gross Profit Margin % would be
expected to increase as a result of an increase in Net Sales.
Margin %. Like the discussion in the box above, this discussion is based on managerial
accounting concepts.
as a mixture of fixed costs and variable costs. Saying the same thing in a different way—
some of the S&G Expenses stay the same when sales increase (a fixed cost) and some of
the S&G Expenses increase proportionally with the increase in sales (a variable cost). This
results in the total S&G Expenses increasing at a lower rate than the increase in Net Sales.
Depreciation does not change with a change in sales. Depreciation Expense only changes
when new Equipment is purchased.
makes it from the Net Sales (top) line of the Income Statement to the Net Income (bottom) line on
the Income Statement.
.Reset the Model.
utilizing its assets to generate sales. As you can see on the .7-DPont. tab, the Total Assets
Turnover Ratio is the second ratio in the DuPont Analysis and is the ratio that measures Efficiency.
The Total Assets Turnover Ratio shows how many dollars of Net Sales are generated from each
$1 of Total Assets.
Average Total Assets. To better understand what is driving this ratio, it would be helpful to develop
some tools that measure the Efficiency of each of the major categories of assets that make up
Total Assets. Most companies have three major asset categories:
efficiently these asset categories are being managed.
Margin %, Operating Profit Margin %, and Net Profit Margin %.
(enter an X in one box)
company and industry to industry.
a hypothetical company named Goofy Pattern Company (GPC) has the following sales and cash
collection pattern. GPC sells $100 of product each day, and all of those sales are on credit. The
following day GPC collects all $100 of the previous day’s credit sales—and then GPC makes
another $100 of sales on credit. This sales and cash collection pattern continues for all 365 days
of the year. This pattern will result in the following:
Accounts Receivable balance is from that 1 day’s sales (the current day’s sales).
its average Accounts Receivable balance. Based on the above facts, you can easily see that GPC
collects its Accounts Receivable balance 365 times per year; thus the value of GPC’s Accounts
Receivable Turnover Ratio should be 365 times.
average Accounts Receivable balance. Based on the above facts, you can easily see that GPC
has 1 day of sales in its Accounts Receivable balance; thus the value of GPC’s Number of Days’
Sales in Receivables should be 1 day.
observation that GPC’s Accounts Receivable Turnover Ratio is 365 times.
= 365.00 Times
(A/R bal. beg. of yr + A/R bal. end of yr) / 2
Turnover Ratio value, we can verify our observation that GPC’s Number of Days’ Sales in
Receivables is 1 day.
= 1.00 Day
this hypothetical company has given you an intuitive feel for what is being measured by the
Accounts Receivable Turnover Ratio and Number of Days’ Sales in Receivables.
Indicators. RC’s values are fairly typical for a company that makes most of its sales to customers
on credit1.
Receivable balance 8.69 times per year. Using RC’s Accounts Receivable Turnover Ratio value of
8.69, we can calculate that RC’s Number of Days’ Sales in Receivables is 42.00 days. Saying that
RC’s Accounts Receivable Turnover Ratio is 8.69 times and that RC’s Number of Days’ Sales in
Receivables is 42.00 days is saying the same thing, just in a different way.
sale to a customer on credit, 42.00 days later that customer pays the cash to RC for the credit sale.
Note that the 42.00 days is an average and will vary from customer to customer. A company’s
Number of Days’ Sales in Receivables will vary depending on many factors, some of those factors
are:
is always better. Observe the down-arrow after Number of Days’ Sales in Receivables—
indicating that a lower value is always better. These two arrows are indicating the same thing,
collecting Accounts Receivable more often (higher turnover); and thus collecting from customers in
a shorter period of time (lower days), results in a lower average Accounts Receivable balance. A
lower average Accounts Receivable balance means that we are getting our cash quicker, and
getting cash quicker is always a good thing.
is important to keep in mind that credit terms granted to customers and collection efforts on past-
due Accounts Receivable are always a balancing act between two competing factors:
credit to customers with only the absolute best credit rating), customers will be
dissatisfied and the company will miss out on sales. If collection efforts are too
aggressive, customers will be alienated and could be lost forever.
credit to customers with questionable credit ratings), the investment in Accounts
Receivable will be excessive and bad debt expense will be large.
Selling on credit means a company has extended certain credit terms to its customers allowing the
customers to pay for the sale after a certain amount of time.
two Accounts Receivable amounts used for the calculation are the amounts at the
beginning of 2021 and at the end of 2021. The Dec 31, 2020 amount is 2020’s ending
Accounts Receivable amount and is also 2021’s beginning Accounts Receivable
amount.
decimal places. All averages in this book and in the Red Company software will always
be rounded to a whole number. See the appendix on Pg 86 for rounding examples and
directions.
would be Net Credit Sales. In their published financial statements, companies do not split
sales into cash sales and credit sales; thus the Net Sales amount shown on a company’s
Income Statement will be used for the numerator in the Accounts Receivable Turnover Ratio.
alternative calculation method will result in the same value (sometimes there might be a slight
difference due to rounding) as the method shown on the .9-Eff. tab . This alternative calculation
method does not require that you first calculate the Accounts Receivable Turnover Ratio.
= 42.00 Days
Receivables provide insight into how efficiently a company is managing the Accounts Receivable
asset.
Receivables for the ARP companies.
company and industry to industry.
.Reset the Model.
Turnover Ratio measures how many times per year a company sells its average Inventory balance.
To make this ratio easier to think about, assume that a hypothetical company has only one item in
inventory. If the company’s Inventory Turnover Ratio is 4.00 times, that would mean that 4 times
per year the company would:
Number of Days’ Sales in Inventory measures the number of days between when an inventory item
is purchased from a vendor or produced internally and when that item is sold to a customer.
Saying the same thing in a different way, Number of Days’ Sales in Inventory measures how long a
company could make sales out of its current inventory before the inventory balance would be down
to zero.
purchases or produces the item and then sells the item to a customer 3.84 times per year. Using
RC’s Inventory Turnover Ratio value of 3.84, we can calculate that RC’s Number of Days’ Sales in
Inventory is 95.05 days. Saying that RC’s Inventory Turnover Ratio is 3.84 and that RC’s Number
of Days’ Sales in Inventory is 95.05 is saying the same thing, just in a different way.
many factors. Some of these factors are:
Observe the down-arrow after Number of Days’ Sales in Inventory—indicating that a lower value
is better. These two arrows are indicating the same thing, holding inventory for a shorter period of
time before selling the inventory to a customer, results in a lower average Inventory balance. A
lower Inventory balance means that less cash is invested in inventory, and that is a good thing.
to keep in mind that the amount of inventory a company keeps on-hand is always a balancing act
between two competing factors:
missed or delayed due to an out-of-stock condition. This will result in missed sales and
customer dissatisfaction.
excess investment in inventory. Also, as the amount of inventory on-hand increases, the
possibility of obsolete inventory increases.
amounts used for the calculation are the amounts at the beginning of 2021 and at the
end of 2021. The Dec 31, 2020 amount is 2020’s ending Inventory amount and is also
2021’s beginning Inventory amount.
alternative calculation method will result in the same value (sometimes there might be a slight
difference due to rounding) as the method shown on the .9-Eff. tab. This alternative calculation
method does not require that you first calculate the Inventory Turnover Ratio.
= 95.01 Days
insight into how efficiently a company is managing the Inventory asset.
.Reset the Model.
Annual Report Project Companies
ARP companies.
company and industry to industry.
and thus the Inventory Efficiency Indicators do not apply.
of assets that most businesses have: Accounts Receivable, Inventory, and Fixed Assets. The two
Accounts Payable indicators that will be presented next are not directly related to measuring the
efficient management of these three categories of assets. The reasons for including the Accounts
Payable indicators as part of this Efficiency Indicators section are:
made for the purchase of inventory. Delaying the payment of Accounts Payable reduces
the time cash is tied up in the Inventory asset.
indicator, which will be introduced later.
Accounts Payable Turnover Ratio measures how many times per year a company pays its average
Accounts Payable balance.
calculated. The Number of Days’ Purchases in Accounts Payable measures how many days of
inventory purchases are in a company’s average Accounts Payable balance.
Payable balance 7.60 times per year. Using RC’s Accounts Payable Turnover Ratio value of 7.60,
we can calculate that RC’s Number of Days’ Purchases in Accounts Payable is 48.03 days. This
indicates that after making a purchase from a vendor, RC waits an average of 48.03 days before
making a cash payment to the vendor. Saying that RC’s Accounts Payable Turnover Ratio is 7.60
and that RC’s Number of Days’ Purchases in Accounts Payable is 48.03 days is saying the same
thing, just in a different way.
value is always better. Observe the up-arrow after Number of Days’ Purchases in Accounts
Payable—indicating that a higher value is always better. These two arrows are indicating the
same thing, paying Accounts Payable less often; thus waiting more days before paying vendors,
results in a higher average Accounts Payable balance. A higher Accounts Payable balance means
that we are keeping our cash longer, and that is always a good thing. Think of Accounts Payable
as an interest free loan from our vendors.
important to keep in mind that holding on to our cash as long as possible and good vendor
relations are always a balancing act between two competing factors:
its vendors can be damaged. The vendors can place the company on payment-in-
advance or cash-on-delivery (COD) terms. Vendors that feel they have been treated
badly by delayed payments, will not work with the company to meet special rush order
requirements.
higher Accounts Payable balances, which are interest free loans from the vendors.
Accounts Payable amounts used for the calculation are the amounts at the beginning of
2021 and at the end of 2021. The Dec 31, 2020 amount is 2020’s ending Accounts
Payable amount and is also 2021’s beginning Accounts Payable amount.
Payable. This alternative calculation method will result in the same value (sometimes there
might be a slight difference due to rounding) as the method shown on the .9-Eff. tab. This
alternative calculation method does not require that you first calculate the Accounts Payable
Turnover Ratio.
= 48.01 Days
Accounts Payable provide insight into how long a company waits before paying its vendors for
purchases made on credit.
.Reset the Model.
Annual Report Project Companies
Accounts Payable for the ARP companies.
As you can see from the ARP companies, these indicators will vary a lot from company to
company and industry to industry.
company’s operating cycle. This discussion assumes that the company is a merchandising
company. The following are the steps in the operating cycle:
any cash because normally the inventory vendor grants the company credit terms. Let’s
say the vendor expects payment in 48 days.
sits on the shelf for 95 days. While the company has had the inventory for 95 days, it did
not have any cash invested in the inventory for the first 48 of those 95 days, because of the
48 day delay in paying cash to the vendor. Thus while the company has had the inventory
on its shelf for 95 days, it only has its cash invested in the inventory for 47 days (95 total
days minus 48 days before paying the vendor).
receive in any cash, because the company grants credit terms to its customer. Let’s say
the company expects its customer to pay 42 days after the sale.
operating cycle.
Payable, and Accounts Receivable to quantify the number of days in the operating cycle between
when cash is paid out and when cash is received in. As you can see on the .9-Eff. tab: RC’s
Inventory sits on the shelf for 95.05 days – RC takes 48.03 days to pay its vendors – the 95.05 days
reduced by the 48.03 days results in the 47.02 days RC has its cash invested before selling the
Inventory – after selling the Inventory it takes RC 42.00 days to collect cash from the customer –
the net result is 89.02 days between when RC pays cash out and when RC receives cash in.
between when cash is paid out and when cash is received in:
to a customer.
vendor and when cash is paid out to the vendor.
customer and when cash is collected from that customer.
better. A lower value means that we are receiving our cash back-in faster, and that is always a
good thing.
management, Accounts Payable policies, and Accounts Receivable policies and collection efforts,
then what would be the impact on RC’s: Cash balance, Turnover Ratios, Number of Days’
indicators, and Cash-to-Cash Cycle indicator?
shelf before it is sold to a customer. This reduction of 10 days is the result of RC making positive
changes to its Inventory management system.
after this ratio’s name indicates that an increase is good.
down-arrow after this item’s name indicates that a decrease is good.
this indicator’s name shows that a decrease is good.
Accounts Payable. This increase in the number of days taken before paying cash to vendors is the
result of RC negotiating longer (better) credit terms with its vendors.
Accounts Payable:
increase in Cash from the Inventory and Accounts Payable changes is $111,502
($149,783 to $261,285). Observe the red message indicating that Cash is greater than
$250,000. After a few more changes, RC will do something with this excess cash.
would have expected Number of Days’ Sales in Inventory on the 9-Eff tab to be 85.00 rather
than 85.08. This slight .08 difference is caused by rounding the Inventory Turnover Ratio to
2 decimal places and then using this rounded value to calculate the Number of Days’ Sales
in Inventory. When you are doing your homework and your Annual Report Project, always
follow the rounding rules given in the appendix on Pg 86 and you will always be correct.
down-arrow after this ratio’s name indicates that a decrease is good.
54.97 days—the up-arrow after this item’s name indicates that an increase is good.
indicator’s name shows that a decrease is a good thing. The combined decrease in the
Cash-to-Cash Days from the Inventory and Accounts Payable changes is about 17
days.
Accounts Receivable. The decrease in the number of days to collect cash from customers is the
result of RC changing its credit terms granted to customers and an increased emphasis on
collecting past-due accounts.
collect Accounts Receivable:
increase in Cash from the Inventory, Accounts Payable, and Accounts Receivable
changes is $180,543 ($149,783 to $330,326).
the up-arrow after this ratio’s name indicates that an increase is good.
36.00 days—the down-arrow after this item’s name indicates that a decrease is good.
indicator’s name shows that a decrease is a good thing. By comparing the gray box
values to the current values for the Cash-to-Cash Cycle indicator, you can see what
caused Cash-to-Cash Days to decrease by about 23 days.
now needs to do something with that excess cash to get a positive impact on the Total Assets
Turnover Ratio in the DuPont Analysis.
(Be sure to enter this amount as a negative number.)
to $185,000, and to buy back 2,400 shares of its outstanding Common Stock.
1.98 times. As indicated by the up-arrow after this ratio’s name this is a good change. Also
observe that the positive change in this ratio has resulted from the decrease in the denominator,
Average Total Assets. There has not been any increase in the numerator, Net Sales.
31.29%. This positive change is the result of RC more efficiently managing its assets.
a company’s Cash-to-Cash cycle, but these assets are normally a significant component of Total
Assets.
because Fixed Assets are not part of a company’s Cash-to-Cash cycle. A company does not
purchase Fixed Assets (property, plant, and equipment) with the intent of selling them to
customers. A company purchases Fixed Assets to use in the production and sale of products.
Thus the logical efficiency measurement for Fixed Assets is how many dollars of Net Sales is the
company producing with each $1 invested in Fixed Assets—that is exactly what is measured by
the Fixed Asset Turnover Ratio.
each $1 of Average Net Fixed Assets. The up-arrow after this ratio’s name indicates that the
more dollars of sales that can be produced from each $1 of Fixed Assets the better.
company and industry to industry.
The two Net Prop., Plant, & Equip. amounts used for the calculation are the amounts at
the beginning of 2021 and at the end of 2021. The Dec 31, 2020 amount is 2020’s
ending Net Prop., Plant, & Equip. amount, and is also 2021’s beginning Net Prop.,
Plant, & Equip. amount.
used titles are Net Property, plant, and equipment and Property, plant, and equipment, net.
Net Fixed Assets calculation are the amounts for Property, Plant, and Equipment after
deducting Accumulated Depreciation. Look at RC’s Balance Sheets for examples of this.
any additional Property, Plant, and Equipment.
Enter 2,500,000 in Net Sales Tab key
.9-Eff. tab
increasing and the denominator, Average Net Fixed Assets, not changing.
tools to your financial statement analysis tool-kit.
Discussion of Efficiency Indicators.
company to company and industry to industry.
.Reset the Model.
investment is leveraged up to obtain the assets used in the business. As can see on the
.7-DPont. tab, the Assets-to-Equity Ratio is the third ratio in the DuPont Analysis and is the ratio
that measures Leverage. The Assets-to-Equity Ratio measures how many dollars of assets a
company has for each $1 of stockholders’ (owners’) investment. As discussed in Chapter 3,
leverage is also referred to as financial leverage; thus the terms Leverage and financial leverage
will be used interchangeably in this section.
the year being analyzed. Saying the same thing in a different way, the numerator is
Average Total Assets and the denominator is Average Total Stockholders’ Equity. The
two additional Leverage ratios that you will learn in this section will not measure the
average Leverage for the year, but rather will measure the company’s Leverage at the end
of the year.
1. This indicates that on average, for the year 2021, RC has $1.95 of assets for each $1 of
stockholders’ investment. The additional $.95 of assets is the result of RC borrowing from
creditors. Saying the same thing in a different way, on average for the year 2021, for each
$1 of stockholders’ investment RC has borrowed $.95 from creditors. This shows that RC
has a little less debt than equity.
Equity Ratio. Like the Assets-to-Equity Ratio, these two new indicators are also measuring
Leverage. The new indicators are just measuring Leverage in different ways. The reason you are
being introduced to these two new indicators is because the three Leverage Indicators:
shows that 47.42 cents of each $1 of Total Assets is financed with debt. If 47.42 cents of each $1
of Total Assets is financed with debt, then 52.58 cents of each $1 of Total Assets must be financed
with equity.
accounting year. RC’s Debt % shown on the .10-Lev. tab is for 2021; thus the Total Liabilities
amount of $579,827 and the Total Assets amount of $1,222,667 are the December 31, 2021
amounts from RC’s 2021 Balance Sheet.
come from on RC’s December 31, 2021 Balance Sheet. Also note that the Debt % value of
47.42% is also shown in the % of Total column for Total Liabilities.
arrows after its name—indicating that the desirable value depends on various factors. For a
discussion of the factors that determine the desirable value of a Leverage indicator see Pg 23.
Stockholders’ Equity (equity). RC’s Debt-to-Equity Ratio of .90 to 1 shows that RC has $.90 of
debt for each $1.00 of equity.
of the accounting year. RC’s Debt-to-Equity Ratio shown on the .10-Lev. tab is for 2021; thus the
Total Liabilities amount of $579,827 and the Total Stockholders’ Equity amount of $642,840 are the
December 31, 2021 amounts from RC’s 2021 Balance Sheet.
Equity come from on RC’s December 31, 2021 Balance Sheet.
Ratio has up-down-arrows after its name—indicating that the desirable value depends on
various factors.
different way:
equity for each $1 of assets—a little less debt than equity.
a little less debt than equity.
Ratio indicate the same change in financial leverage.
.Reset the Model.
$550,000—increased debt. Treasury Stock has gone from $0 to ($250,000)—decreased equity.
equity for each $1 of assets—a lot more debt than equity.
equity—a lot more debt than equity.
Financial Leverage and Interest Coverage.
company to company and industry to industry.
.Reset the Model.
Equity Ratio because the debt that creates financial leverage also creates the requirement for a
company to pay interest on that debt.
ratio is currently showing that RC has available $12.33 of earnings before interest and taxes for
each $1 of interest it must pay to creditors. At this level of coverage, the creditors can feel quite
certain there will be adequate earnings to cover their interest.
income tax expense. It is calculated as follows:
available to pay interest are before income taxes. Saying the same thing in a different way,
creditors get their interest before the government gets its income taxes. Given the structure of
RC’s Income Statement, earnings before interest and taxes is the same as Operating Income.
This will not always be true, but in RC’s case it is.
had just enough earnings before interest and taxes to cover interest expense.
enough earnings before interest and taxes to cover interest expense. Notice that Pre-Tax Income,
Provision for Income Taxes, and Net Income are all now zero.
of earnings before interest and taxes for each $1 of interest expense.
Interest Earned Ratio had a value over 12. With a value that high, the creditor’s interest payments
had a good margin of safety. The fact that RC still has adequate earnings to cover interest
expense, after Net Sales decreased by over $850,000 (a decrease of over 40%) and after the Cost
of Goods Sold Percent increased from 57 to 60, shows how large that margin of safety was.
higher value indicates a greater ability to pay interest out of current earnings.
the interest on its debt. Creditors look to this ratio as one indication of the safety of their future
interest payments.
Interest Coverage.
company and industry to industry.
additional insight into what drives The Toro Company’s DuPont ratios. Specifically you will be
drilling down into Toro’s: Profitability, Efficiency, and Leverage. Use the form in the Excel file
Red Company Chapter 4 Homework Form to record your answers. For information and
examples on how to round your answers, see the appendix on Pg 86 in the file 6 – Annual Report
Project and Rounding Rules .
financial statements that you printed when you worked the Chapter 2 Homework. For an
introduction to Toro’s financial statements, see Pg 18 in the file 2 – Vertical and Horizontal
Analysis .
used for the:
places.
up-arrow indicator down-arrow indicator up-down-arrow indicator
Which year, 2017 or 2016, had a better Gross Profit Margin %?
are used for the:
2. Denominator? – The line item name on Toro’s financial statement and the $ amount.
decimal places.
up-arrow indicator down-arrow indicator up-down-arrow indicator
%. Which year, 2017 or 2016, had a better Operating Profit Margin %?
Number of Days’ Sales in Receivables
line items are used for the:
Receivables, net: Customers amount should be used for the denominator.)
Receivable to a whole number. Round your final answer to 2 decimal places.
up-arrow indicator down-arrow indicator up-down-arrow indicator
Turnover Ratio. Which year, 2017 or 2016, had a better Accounts Receivable Turnover
Ratio?
calculated in B. above. Round your final answer to 2 decimal places.
up-arrow indicator down-arrow indicator up-down-arrow indicator
in Receivables. Which year, 2017 or 2016, had a better Number of Days’ Sales in
Receivables?
Number of Days’ Sales in Inventory
are used for the:
number. Round your final answer to 2 decimal places.
up-arrow indicator down-arrow indicator up-down-arrow indicator
Ratio. Which year, 2017 or 2016, had a better Inventory Turnover Ratio?
calculated in B. above. Round your final answer to 2 decimal places.
up-arrow indicator down-arrow indicator up-down-arrow indicator
in Inventory. Which year, 2017 or 2016, had a better Number of Days’ Sales in Inventory?
Number of Days’ Purchases in Accounts Payable
items are used for the:
2. Denominator? – The line item name on Toro’s financial statement and the $ amounts.
Payable to a whole number. Round your final answer to 2 decimal places.
up-arrow indicator down-arrow indicator up-down-arrow indicator
Turnover Ratio. Which year, 2017 or 2016, had a better Accounts Payable Turnover Ratio?
Turnover Ratio calculated in B. above. Round your final answer to 2 decimal places.
up-arrow indicator down-arrow indicator up-down-arrow indicator
Purchases in Accounts Payable. Which year, 2017 or 2016, had a better Number of Days’
Purchases in Accounts Payable?
2016.
are used for the:
2. Denominator? – The line item name on Toro’s financial statement and the $ amounts.
whole number. Round your final answer to 2 decimal places.
up-arrow indicator down-arrow indicator up-down-arrow indicator
Ratio. Which year, 2017 or 2016, had a better Fixed Asset Turnover Ratio?
calculate the numerator, Total Liabilities for 2017. Toro does not show a line item on
their Balance Sheet for Total Liabilities.)
up-arrow indicator down-arrow indicator up-down-arrow indicator
Debt % which year, 2017 or 2016, had more financial leverage at the end of the year?
used for the:
places.
up-arrow indicator down-arrow indicator up-down-arrow indicator
Based on the Debt-to-Equity Ratio which year, 2017 or 2016, had more financial leverage
at the end of the year?
items are used for the:
calculate the numerator, Earnings before Interest and Taxes for 2017.)
decimal places.
up-arrow indicator down-arrow indicator up-down-arrow indicator
Ratio. Which year, 2017 or 2016, had a better Times Interest Earned Ratio?
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