•Liquidity position is weak.
48Other Liquidity Ratios•Cash Ratio = Cash / CL86/1,145= .075x•NWC to Total Assets = NWC / TA(2,680 –1,145) / 3,497 = 0.439x•Interval Measure = CA / average daily operating costs2,680 / ((5,876 + 550)/365) = 152.2 days
492. Long-term Solvency •Also known as financial leverageratios. Financial leveragerelates to the extent that a firm relies on debt financing rather than equity. Generally, the more debt a firm has, the more likely it is the firm will become unable to fulfill its contractual obligations.♦Total Debt Ratio = Total Debt / Total AssetsVARIATIONS:♦Debt/Equity Ratio = (total assets –total equity) / total equity♦Equity Multiplier = total assets/total equity = 1 + debt/equity ratio♦Long-Term Debt Ratio = long-term debt / (long-term debt + total equity)COVERAGE RATIOS:♦Times Interest Earned Ratio = EBIT / interest♦Cash Coverage Ratio = (EBIT + depreciation) / interest
50D’Leon’s Long-Term Solvency RatiosTotal Debt Ratio= Total debt / Total assets= ($1,145 + $400) / $3,497 = 0.442 or 44.2%Times Interest Earned = EBIT / Interest expense= $492.6 / $70 = 7.0x200920082007Ind.D/A44.2%82.8%54.8%50.0%TIE7.0x-1.0x4.3x6.2x•At this point, D/A and TIE appear to be better than the industry average.
513. Asset Management Ratios•Also known as activity ratios, they measure how effectively the firm’s assets are being managed:•Inventory ratiosmeasure how quickly inventory is produced and sold•Receivable ratiosprovide information on the success of the firm in managing its collection from credit customers•Fixed asset and total asset turnover ratiosshow how effective the firm is in using its assets to generate sales
52200920082007Ind.InventoryTurnover3.42x4.30x4.51x4.82xInventory Turnover = COGS / Inventory = $5,876/$1,716 = 3.42xD’Leon’s Inventory turnover for 2009:•Inventory turnover below industry average. D’Leon might have old inventory, or its control might be poor.Days’ Sales in Inventory = 365 / Inventory Turnover. For 2007, Days’ Sales in Inventory = 365/3.42 = 106.7 days.200920082007Ind.Days’ Sales in Inventory106.7 days84.9 days80.9 days75.7 days
53200920082007Ind.ReceivablesTurnover8.01x9.55x9.76x11.4xRec. turnover = Sales / Receivables= $7,036 / $878 = 8.01xD’Leon’s Receivables Turnover for 2009:Days Sales Outstanding or Account Receivable Days or Average Collection Period= The average number of days after making a sale before receiving cashAccount ReceivableAverage Daily Sales DSO =365Salesor DSO= 365/Receivables Turnover
54DSO= Account Receivable/ Average Daily Sales= Receivables / Sales/365= $878 / ($7,036/365)= $878/$19.277 = 45.6 (Days)D’Leon’s Days Sales Outstanding for 2009:200920082007Ind.DSO45.638.237.432.0•D’Leon collects on sales too slowly, and is getting worse.•D’Leon has a poor credit policy.
55D’Leon’s Fixed Asset and Total Asset Turnover Ratios for 2009:FA Turnover= Sales / Net fixed assets = $7,036 / $817 = 8.61xTA Turnover= Sales / Total assets = $7,036 / $3,497 = 2.01x200920082007Ind.FA TO8.6x6.4x10.0x7.0xTA TO2.0x2.1x2.3x2.6x•FA turnover exceeded the industry average in 2009.