Accounting for Managers

Resources, Accounting for Managers
213
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All the turnover numbers are meaningless by themselves. You
need industry averages to give these figures significance. You
might guess from only a little more than three inventory turns in
a year that GW’s widgets are pricey.
Accounting for Managers
214
Ratio
Formula
Answer
Current
Current Assets
Current Liabilities
1,377,400 / 917,400 =
1.50
Quick (Acid)
Current Assets – Inventory
Current Liabilities
(1,377,400 – 444.400) /
917,400 = 1.02
Net Working
Capital
Current Current
Assets Liabilities
1,377,400 – 917,400 =
$460,000
Accounts
Collection Period
Accounts Receivable
Sales / 360 days
500,000 / (3,500,000 /
360) = 51.43
Average Payment
Period
Accounts Payable
Purchases / 360 days
580,000 / (575,000 /
360) = 363.13
Fixed Assets
Turnover
3,500,000 / 3,800,000 =
.92
Sales
Fixed Assets
Total Asset
Turnover
3,500,000 / 5,177,400 =
.68
Sales
Total Assets
Inventory
Turnover
Cost of Goods Sold
Total Inventory
1,450,000 / 444,400 =
3.26
Debt-to-Assets
Total Liabilities
Total Assets
Debt-to-Equity
3,267,400 / 5,177,400 =
.63
2,000,000 / 5,177,400 =
.39
Long-Term Debt
Total Equity
EBIT
Interest
1,150,000 / 75,000 =
14.00
Times Interest
Earned
Gross Profit
Margin
Total Assets Turnover
x Net Profit Margin
Sales - Cost of Goods Sold
Sales
(3,500,000 – 1,450,000) /
3,500,000 = .59
Operating Profit
Margin
EBIT
Sales
1,150,000 / 3,500,000 =
.33
Net Profit Margin
Net Profit
Sales
693,000 / 3,500,000 =
.20
Return on
Investment
(3,500,000 / 5,177,400)
x (693,000 / 3,500,000)
= .13
Return on Equity
Net Profit
Shareholder Equity
693,000 / 1,910,000 =
.36
Inventory to Net
Working Capital
Inventory
Net Working Capital
444,400 / 460,000 = .97
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About the only thing that gives you a rough feel for GW is
the various profitably ratios. If you have a general idea of how
the economy and markets are moving, GW’s profitability ratios
are probably pretty good.
If we try to get a picture of GW from just this ratio analysis
in a vacuum, we’re unlikely to glean any significant information.
Couple these raw numbers with industry or internal perform-
ance comparisons and you have the makings of some manage-
ment performance indicators.
Also, one of the beauties of ratios is that you can develop
your own if you find a significant correlation between two num-
bers.
Here’s an example. Let’s say that I’m a CFO who wonders
about the relationship between net working capital and gross
revenue. So I develop a NWC ratio: