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Problem 6-7: Asset Utilization Ratios Measure How Efficient A Business Is at Using Its Assets To Make Money
Problem 6-7: Asset Utilization Ratios Measure How Efficient A Business Is at Using Its Assets To Make Money
1.
Problem 6-7
Asset utilization ratios measure the efficiency with which the firm uses its assets to
generate sales revenue to reach a sufficient profitability level. Asset utilization ratios
measure how efficient a business is at using its assets to make money.
Asset turnover, total asset turnover, or asset turns is a financial ratio that measures
the efficiency of a company's use of its assets in generating sales revenue or sales
income to the company.
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The ratio measures the efficiency of how well a company uses assets to produce sales. A higher ratio is
favorable, as it indicates a more efficient use of assets. Conversely, a lower ratio indicates the company
is not using its assets as efficiently
2. Lennox operating profit margin is higher because its sales opver the period
remains higher than Tecumseh Product Company.
Management compensation These days most of the businesses are run by professional managers who
are part of management team. This leads to separation of ownership and control which leads to conflict
between shareholders and managers. These professional managers are paid additional incentives apart
from regular monthly salaries. With better company's performance and growth of business managers
are paidh inhcentivhes ash compensathion or chrediting them fhor company's performhanceh.
Shareholder will be woried if the roiis unable to cover the cost of capital.
expenditure
shareholders
shareholders
become insolvent
to shareholders
Cannibalization of sales
(ROI)
outlets
time
1.2
breached?
bond or loan;
Revenue = $50m
20% of Revenue = $10m
EBITDA = $20m
80% of EBITDA = $16m
Target payout for Revenue = 70%
Target payout for EBITDA = 85% (Pro-rated)
% Target Payout
Threshold 70%
Target 100%
Maximum 140%
¡ Decrease provisions
H Potential acceleration of
earnings during bad years and recording less revenue during good yearsHHHHHHH
(COGS)
HH
HH
6-1
1. Which company has shown the strongest sales growth over the past three
years?
assume that Kroger co. has shown the strongest sales growth over
the past three years because of the of a more positive annual sales
growth rate.
2. Which company was the most profitable in its most recent fiscal year? - What
was the source of that superior profitability—a profit margin advantage or better
turnover?
With the average ROA taken into account for the 3 companies, it can
be concluded with the information provided that Kroger co. had the
1.Current Ration i.e (Current Assets/ Current Liabilities) reflected the liquidity of the
organizations.
Cash conversion cycle presents the time needed for the organization in between
procurement of raw material and receiving the moneys from its buyer.
Since Ross store has the least current ration i.e. 1.36, we might say that it owns least liquid
assets at present.
but the ratio is above 1 then we might say that the organization owns enough current assets
to satisfy its current obligation. To support the same quick ratio analysis is required.
2. Occupancy Cost includes costs related to occupying a space including; rent, real estate
taxes, personal property taxes, insurance on building and contents, depreciation, and
amortization expenses.
if the same related to cost of goods sold included in Cost of Goods sold then more
weightage would be assigned to the Days inventory held, as an additional day will be costly
to the organization.
3. Ross store's 2.2 days accounts receivable outstanding is result of its practice of selling
goods on credit.
4.Aerostale & the GAP having 0 day accounts receivable is result of its policy of only cash
sale.
For 2016:
= $14,775.25 million
= 6.1%
For 2017:
= $15,532.4million
= 8.9%
For 2018:
= $16,880.95 million
= 14.7%
For 2016:
= 5.56%
= 1.065
ROA = 0.0556*1.065
= 5.92%
For 2017:
= 6.82%
= 1.28
ROA = 0.0682*1.28
= 8.73%
For 2018:
= 9.9%
= 1.40
ROA = 0.099*1.4
= 13.86
3. Yes, the profitability has changed over the three years. In 2016, the net profit margin was
. 5.56%, which increased to 6.82%. In 2018, the net profit margin came to be 9.9%. The profitability has
shown an increasing trend over the three years.
For 2016:
= $8,052.3 million
= 11.182%
For 2017:
= $8,669.75 million
= $15.92%
For 2018:
= $9,643.4 million
= 25.73%