Ratio_1
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5 2 Asset Utilization Measurements T his chapter focuses on the ratios and formulas that can be derived primarily from the income statement. There are several that require additional informa- tion from the balance sheet, as well as internal information, such as employee headcount, that may not be readily discernible from published financial state- ments. The general intent of the analysis tools presented here is to show a com- pany’s ability to sustain its sales, the level of asset and expense usage required to do so, and the sustainability of its current sales and expense levels. There are also specialized ratios that deal with such issues as sales returns, repairs and mainte- nance, fringe benefits, interest expense, and overhead rates. Each of the following sections describes the uses of a ratio or formula, explains the proper method of calculation, and gives an example. Each section also dis- cusses how each ratio or formula can be misused, skewed, or incorrectly applied. The ratios and formulas presented in this chapter are: Sales to Working Capital Ratio Discretionary Cost Ratio Sales to Fixed Assets Ratio Interest Expense to Debt Ratio Sales to Administrative Expenses Ratio Foreign Exchange Ratios Sales to Equity Ratio Overhead Rate Sales per Person Goodwill to Assets Ratio Sales Backlog Ratio Overhead to Cost of Sales Ratio Sales Returns to Gross Sales Ratio Investment Turnover Repairs and Maintenance Expense to Break-Even Point Fixed Assets Ratio Accumulated Depreciation to Fixed Margin of Safety Assets Ratio Fringe Benefits to Wages and Salaries Tax Rate Percentage Expense Sales Expenses to Sales Ratio
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Transcript of Ratio_1
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52Asset UtilizationMeasurements
This chapter focuses on the ratios and formulas that can be derived primarilyfrom the income statement. There are several that require additional informa-tion from the balance sheet, as well as internal information, such as employeeheadcount, that may not be readily discernible from published financial state-ments. The general intent of the analysis tools presented here is to show a com-panys ability to sustain its sales, the level of asset and expense usage required todo so, and the sustainability of its current sales and expense levels. There are alsospecialized ratios that deal with such issues as sales returns, repairs and mainte-nance, fringe benefits, interest expense, and overhead rates.
Each of the following sections describes the uses of a ratio or formula, explainsthe proper method of calculation, and gives an example. Each section also dis-cusses how each ratio or formula can be misused, skewed, or incorrectly applied.
The ratios and formulas presented in this chapter are:
Sales to Working Capital Ratio Discretionary Cost RatioSales to Fixed Assets Ratio Interest Expense to Debt RatioSales to Administrative Expenses Ratio Foreign Exchange RatiosSales to Equity Ratio Overhead RateSales per Person Goodwill to Assets RatioSales Backlog Ratio Overhead to Cost of Sales RatioSales Returns to Gross Sales Ratio Investment TurnoverRepairs and Maintenance Expense to Break-Even Point
Fixed Assets RatioAccumulated Depreciation to Fixed Margin of Safety
Assets RatioFringe Benefits to Wages and Salaries Tax Rate Percentage
ExpenseSales Expenses to Sales Ratio
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