Top-Level Planning and Analysis CMA Part 1 Here are the key ratios. It would be a good idea to recalculate these ratios so you understand them. Industry Actual Forecast Average 2009 2010 2009 Current ratio 1.6 to 1 1.4 to 1 2.0 to 1 Inventory turnover 6.0 times 6.0 times 5.5 times Days sales in inventory 60.8 days 60.8 days 66.4 days Accounts receivable turnover 8.9 times 8.9 times 8.0 times Days sales in receivables 41.0 days 41.0 days 45.6 days Interest coverage ratio 6.0 to 1 6.1 to 1 7.2 to 1 Asset turnover 1.8 times 1.8 times 1.9 times Debt-to-equity ratio 80.9% 88.6% 75.0% Gross profit margin 24.5% 24.5% 30.7% Net profit margin 3.2% 3.2% 4.5% Return on assets 5.6% 5.6% 8.5% Return on equity 10.2% 10.6% 12.0% Of course, the ratios for forecasted 2010 are very similar to the ratios for actual 2009. That is because we used the 2009 ratios between the various items and sales as models for the 2010 forecast. The first step is to analyze these ratios and especially to compare them with the industry averages. ABCs ratios are a little better than the industry averages for inventory and receivables turnover but worse than the industry averages for everything else. After comparing the companys ratios to the industry averages, the next step will be to analyze the actual and pro forma financial statements to determine what is causing ratios that are worse than the industry averages to be worse than the industry averages. ABCs debt to equity ratio is higher than the industry average, which means its Interest expense is higher than that of its peers. Furthermore, a considerable amount of the debt is short-term, and that is causing its current ratio to be lower than the industry average. ABCs gross profit margin, net profit margin, return on assets and return on equity are all much lower than the industry averages. This means ABC is making fewer dollars of sales for each dollar invested in assets than other companies in the same industry; and also that the amount of profit it is earning on each dollar of those sales is lower. As a result of this analYSiS, ABC is looking at its cost of sales to see if there is waste in the production process. It is also studying the profitability analyses by product line to determine whether some of the less profitable product lines should be discontinued or changed. If the company can improve its profitability, it should be able to pay down some of its debt and lower its interest expense, as well. After the company makes its decisions about operational changes to be made, it will revise the pro forma statements for 2010 and recalculate the ratios to see whether the changes will create enough improvement in the ratios to enable the company to reach its targets. If so, it will pursue those changes. If not, the company will reconsider what else needs to be changed in its operations in order to achieve its objectives. After the pro forma financial statements have been revised and the operational changes have been made, the companys management will need to evaluate its actual results against the pro forma statement to determine whether its objectives have been met. The primary method of making this determination will be a comparison of the actual ratios and the pro forma ratios. We do not show the revised pro forma financial statements or the revised ratios here.
Posted on: Tue, 11 Mar 2014 06:14:27 +0000
Trending Topics
Recently Viewed Topics
© 2015