fm22 15 - amounts of current assets in relation to sales It...

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Mini Case: 22 - 15 SKI INDUSTRY Current 1.75 2.25 Quick 0.83 1.20 Debt/Assets 58.76% 50.00% Turnover Of Cash And Securities 16.67 22.22 Days Sales Outstanding (365-Day Basis) 45.63 32.00 Inventory Turnover 4.82 7.00 Fixed Assets Turnover 11.35 12.00 Total Assets Turnover 2.08 3.00 Profit Margin On Sales 2.07% 3.50% Return On Equity (ROE) 10.45% 21.00% Payables Deferral Period 30.00 33.00 a. Barnes plans to use the ratios shown below as the starting point for discussions with SKI’s operating executives. He wants everyone to think about the pros and cons of changing each type of current asset and how changes would interact to affect profits and EVA. Based on the table 22-1 data, does SKI seem to be following a relaxed, moderate, or restricted working capital policy? Answer: A company with a relaxed working capital policy would carry relatively large
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Unformatted text preview: amounts of current assets in relation to sales. It would be guarding against running out of stock or of running short of cash, or losing sales because of a restrictive credit policy. We can see that SKI has relatively low cash and inventory turnover ratios. For example, sales/inventories = 4.82 versus 7.0 for an average firm in its industry. Thus, SKI is carrying a lot of inventory per dollar of sales, which would meet the definition of a relaxed policy. Similarly, SKI’s DSO is relatively high. Since DSO is calculated as receivables/sales per day, a high DSO indicates a lot of receivables per dollar of sales. Thus, SKI seems to have a relaxed working capital policy, and a lot of current assets....
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