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3. Asset management ratios Asset management ratios are used to measure how effectively a firm manages its assets, by relating the amount a firm has invested in a particular type of asset (or group of assets) to the amount of revenues the asset is generating. Examples of asset management ratios include the average collection period (also called the days sales outstanding ratio), the inventory turnover ratio, the fixed asset turnover ratio, and the total asset turnover ratio. Consider the following case: Graham Pharmaceuticals has a quick ratio of 2.00x, $27,450 in cash, $15,250 in accounts receivable, some inventory, total current assets of $61,000, and total current liabilities of $21,350. The company reported annual sales of $400,000 in the most recent annual report. Over the past year, how often did Graham Pharmaceuticals sell and replace its inventory? 24.05 x 8.01 x 2.86 x 21.86 x The inventory turnover ratio across companies in the pharmaceutical industry is 18.58x. Based on this information, which of the following statements is true for Graham Pharmaceuticals? Graham Pharmaceuticals is holding more inventory per dollar of sales compared to the industry average. Graham Pharmaceuticals is holding less inventory per dollar of sales compared to the industry averace You are analyzing two companies that manufacture electronic toys-Like Games Inc. and Our Pay Inc. Like Games was launched eight years ago whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $100,000 each. You've collected company data to compare Uke Games and Our Play. Last year, the average sales for all industry competitors was $1,020,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You've collected data from the companies financial statements. This information is listed as follows: Industry Average Data Collected (in dollars) Like Games Our Play Accounts receivable 10.000 15,600 Net fixed assets 220,000 320,000 Total assets 380,000 500,000 11,500 867,000 938,400 Using this information, complete the following statements to include in your analysis. 1. Our Play has days of sales tied up in receivables, which is much collect cash from its customers than it takes Like Games than the industry average. It takes Our Play time to YOU 2. Like Games's fixed assets turnover ratio is than that of Our Play. This is because Like Games was formed eight years ago, so the acquisition cost of its fixed assets is recorded at historic values when the company bought its assets and has been depreciated since then. Assuming that fixed assets prices (not book values) rose over the past six years due to inflation, Our Play paid amount for its fixed assets 0000 3. The average total assets turnover in the electronic toys industry is 1.09x, which means that $1.09 of sales is being generated with every dollar of Investment in assets, A total assets turnover ratio indicates greater efficiency. Both companies total assets turnover ratios are than the industry average. Interest Save & Conti Gewing S. Profitability ratios Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Randall and Arts Inc. and make comments on its second-year performance as compared to its first-year performance. The following shows Randall and Arts Inc.'s income statement for the last two years. The company had assets of $11,750 million in the first year and $18,796 million in the second year. Common equity was equal to $6,250 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Randall and Arts Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 5,000 1,723 200 Net Sales Operating costs except depreciation and amortization Depreciation and amortization Total Operating costs Operating Income (or EBIT) Less: Interest Earnings before taxes (EBT) Less: Taxes (40%) Net Income 6,350 1,855 318 2,173 4,177 418 3,759 1,923 3,077 400 2,677 1,071 1,606 1,504 2,255 Calculate the profitability ratios of Randall and Arts Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 61.54% Operating margin Profit margin 35.51% Return on total assets 13.67% 25.70% Return on common equity Basic earning power 22.22% Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability ratios. Check all that apply. A higher operating margin than the industry average indicates either lower operating costs, higher product pridno, or both If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. An increase in the return on assets ratio implies an increase in the assets a firm owns. If a company issues new common shares but its net income does not increase, return on common equity will increase. 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