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We can investigate a little bit further, though, as we did with the total asset turnover ratio before we can make our final assessment. However, we need to look at which of the fixed assets have increased so much in case it's not as simple as it might look: Carphone Warehouse Consolidated Balance Sheet 31 March 2001 25 March 2000 Fixed assets £'000 £'000 Intangible Assets 231,471 26,933 Tangible assets 120,278 63,190 Investments 44,426 11,584 Total Fixed Assets 396,175 100,279 Whilst tangible fixed assets such as land, buildings, machinery and so on have doubled and investments have quadrupled, the largest increase of all is in intangible assets. The notes to the financial statements in the Carphone Warehouse's annual report shows us that the majority of the intangible asset came from the goodwill arising from having bought the rest of the shares in a business in which it already had a 76% holding in. Here are those notes: Intangible fixed assets: good...

The data: Carphone Warehouse Consolidated Profit and Loss Account 31 March 2001 25 March 2000 for the year ended £'000 £'000 Turnover 1,110,678 697,720 Total Fixed Assets 396,175 100,279 Total Current Assets 315,528 171,160 The calculations Fill in the figures and calculate the ratio values Fixed Asset Turnover Ratio for the Carphone Warehouse 31 March 2001 __________ times 25 March 2000 __________ times Did you get this ? What did you think of those results? Well, 2001's result is less than 50% of 2000's result, which is poor on the face of it. 2001 2000 Change 2000 - 2001 Turnover 1,110,678 697,720 59.19% Total Fixed Assets 396,175 100,279 295.07% In the situation we see here, we will always find that whilst the business is growing, it is growing in such a way that its ratios cannot stay constant. Here we have a 59% increase in sales and a 295% increase in fixed assets: this is bound to mean that the fixed asset turnover wil...

Let's take a more detailed look at asset usage and efficiencies now by splitting down the total asset usage ratio into its component parts. We know that total asset turnover matches the turnover of a business with all of the assets it has used to generate that turnover - the bigger the value of the ratio the better. We can break this ratio into two to start with so that we can see in more detail how those assets have been used. The two ratios we will look at are: Fixed Asset Turnover = Turnover Fixed Assets Current Asset Turnover = Turnover Current Assets Let's find the data for the Carphone Warehouse, do the calculations and then discuss what we have found. Source: http://www.bized.co.uk/

Advanced Asset Usage The advanced equations for this section are: Fixed Asset Turnover = Turnover Fixed Assets Current Asset Turnover = Turnover Current Assets Capital Employed Turnover = Turnover Equity Shareholders' Funds Working Capital Turnover = Sales Working Capital Look at this as we try to unravel the more involved aspects of asset usage or turnover: Vodafone plc 31 Mar 2002 31 Mar 2001 Consolidated balance sheet £m £m Fixed assets Intangible Assets 105,944 108,853 Tangible assets 18,541 10,586 Investments 28,977 34,769 Total Fixed Assets 153,462 154,208 Look where the growth in assets is taking place - intangible assets. These intangible assets seem to have appeared between 1999 and 2000 and are probably the reason for such a dreadful total asset turnover ratio. Incidentally most of the intangible assets are goodwill, by the way. For the sake of argument, if we assumed that the goodwill had been around £100 mill...

The asset turnover ratio simply compares the turnover with the assets that the business has used to generate that turnover. In its simplest terms, we are just saying that for every £1 of assets, the turnover is £x. The formula for total asset turnover is: Total Asset Turnover = Turnover Total Assets As usual, we'll take a look at the Carphone Warehouse's total asset turnover ratios first, for practice, and then we'll try to work out what we've found. Here are the figures we need: Carphone Warehouse Consolidated Profit and Loss Account 31 March 2001 25 March 2000 £'000 £'000 Turnover 1,110,678 697,720 Total Fixed Assets 396,175 100,279 Total Current Assets 315,528 171,160 Total Asset Turnover Ratio for the Carphone Warehouse 31 March 2001 1,110,678 396,175 + 315,528 = 1.56 times 25 March 2000 697,720 100,279 + 171,160 = 2.57 times We see the result of 1.56 times for 2001 ... this means that turnover is 1.56 times bigger than...

Asset Usage The assessment of asset usage is important as it helps us to understand the overall level of efficiency at which a business is performing. The basic equations for this section are: Total Asset Turnover = Turnover Total Assets Stock Turnover = Average Stocks Credit Sales/365 Debtors' Turnover = Average Debtors Credit Sales/365 Creditors' Turnover = Average Creditors Credit Sales/365 The assessment of asset usage is important as it helps us to understand the overall level of efficiency at which a business is performing. Our basic ratios for this section are Total asset turnover - The overall efficiency of the business. We will look at total asset turnover and net asset turnover; then we will investigate the fixed and current asset turnover ratios. Stock turnover , Debtors' turnover and Creditors' turnover help us to assess the liquidity position as well as giving us detailed information about stock co...

Asset Usage The assessment of asset usage is important as it helps us to understand the overall level of efficiency at which a business is performing. The basic equations for this section are: Total Asset Turnover = Turnover Total Assets Stock Turnover = Average Stocks Credit Sales/365 Debtors' Turnover = Average Debtors Credit Sales/365 Creditors' Turnover = Average Creditors Credit Sales/365 The assessment of asset usage is important as it helps us to understand the overall level of efficiency at which a business is performing. Our basic ratios for this section are Total asset turnover - The overall efficiency of the business. We will look at total asset turnover and net asset turnover; then we will investigate the fixed and current asset turnover ratios. Stock turnover , Debtors' turnover and Creditors' turnover help us to assess the liquidity position as well as giving us detailed information about stock c...

Ratio Analysis 3: Working Capital Management 1: Liquidity Basic : Total asset turnover Activity 11 - Vodafone total asset turnover ratio Advanced : Split the Total Asset Turnover Ratio: fixed asset and current asset turnovers Fixed asset turnover Fixed Asset Turnover: Advanced 1 Current Asset Turnover Activity 12 - Vodafone Fixed and Current Asset Turnover ratios Fixed Asset Turnover: Advanced 2 Capital Employed Turnover Activity 13 - Capital Employed Turnover Working Capital Turnover Activity 14 - Vodafone Working Capital Turnover Source: http://www.bized.co.uk/

No such thing as an Ideal Ratio It's time to say that whatever you've read about the ideal current ratio being 2:1 and the ideal acid test ratio being 1: 1 forget it ! This is a golden rule ...there's no such thing as an ideal current ratio or acid test ratio ... or an ideal any other ratio for that matter. We still need to know whether 0.98: 1 and 1.42: 1 are good results, though. For the Carphone Warehouse, there has been a major turnaround between the two years as the ratio has increased from 0.98: 1 to 1.42:1. Look at the accounting information above and you can see that whilst the business has increased its sales by 59% over the two years, its stocks are almost unchanged; debtors have increased by 80%, investments by 316% and cash by 166%. As always, we have to point out that we only have two years' worth of data so any conclusions we can draw have to be done cautiously. You can now attempt some additional questions or move on to Asset usage Source: ht...

The Current Ratio The current ratio is also known as the working capital ratio and is normally presented as a real ratio. That is, the working capital ratio looks like this: Current Assets: Current Liabilities = x: y eg 1.75: 1 The Carphone Warehouse is our business of choice, so here is the information to help us work out its current ratio. Consolidated Balance Sheet 31 March 2001 25 March 2000 £'000 £'000 Total Current Assets 315,528 171,160 Creditors: Amounts falling due within one year 222,348 173,820 As we saw in the brief review of accounts section with Tesco's financial statements, the phrase current liabilities is the same as Creditors: Amounts falling due within one year . Here's the table to fill in. OK, so we've done this one for you! Current Ratio For the Carphone Warehouse 31 March 2001 Current Assets: Current Liabilities 315,528: 222,348 1.42: 1 25 March 2000 Current Assets: Current Liabilities 171,160: 173,820 0.98: 1 Math...

Liquidity ratios Current Assets: Current Liabilities (Current Assets-Stocks): Current Liabilities The two liquidity ratios, the current ratio and the acid test ratio, are the most important ratios in almost the whole of ratio analysis are also the simplest to use and to learn. Source: http://www.bized.co.uk/

Working capital management is concerned with making sure we have exactly the right amount of money and lines of credit available to the business at all times. In part 1 of our look at working capital management we will look at the liquidity ratios. Cash is the life-blood of any business, no matter how large or small. If a business has no cash and no way of getting any cash, it will have to close down. It's that simple! Following on from this we can see that if a business has no idea of its liquidity and working capital position, it could be in serious trouble. Ratio Analysis 3: Working Capital Management 1: Liquidity Liquidity ratios The Current Ratio: Activity 9 - Vodafone Current Ratio The Acid Test ratio Activity 10 : Vodafone Acid Test An ideal ratio? Additional question 12 Additional question 13 Additional question 14 Source: http://www.bized.co.uk/

Let's take a look now at some of what we have talked about so far but in a different way. Here are the return on assets (ROA) and net profit margin values for several companies in the same (retailing) industry. What can we say about these results? Company Industry ROA Profit Margin Marks & Spencer Retailer and Financial Services 4.43% 3.91% J Sainsbury Retailer and Financial Services 5.60% 3.61% Thorntons Retailer of Chocolates etc 8.43% 6.45% Next Retailer of Clothing 26.14% 13.82% Dixons Group Retailer of Electronic etc Goods 19.78% 14.41% Yates Group Retailer of Food 9.13% 13.34% Safeway Retailer of Food 7.24% 4.14% Morrisons Retailer of Food 12.93% 5.87% Tesco Retailer of Food and Household Goods 9.99% 5.72% Textbooks might lead us to expect that the ROA and Profit Margins for each company in an industry ought to be the same as each other - we don't see that here do we? To try to isolate some patterns, though, we should classify this table even more tha...

Let's take a look now at some of what we have talked about so far but in a different way. Here are the return on assets (ROA) and net profit margin values for several companies in the same (retailing) industry. What can we say about these results? Company Industry ROA Profit Margin Marks & Spencer Retailer and Financial Services 4.43% 3.91% J Sainsbury Retailer and Financial Services 5.60% 3.61% Thorntons Retailer of Chocolates etc 8.43% 6.45% Next Retailer of Clothing 26.14% 13.82% Dixons Group Retailer of Electronic etc Goods 19.78% 14.41% Yates Group Retailer of Food 9.13% 13.34% Safeway Retailer of Food 7.24% 4.14% Morrisons Retailer of Food 12.93% 5.87% Tesco Retailer of Food and Household Goods 9.99% 5.72% Textbooks might lead us to expect that the ROA and Profit Margins for each company in an industry ought to be the same as each other - we don't see that here do we? To try to isolate some patterns, though, we should classify this table even more tha...

Without any help from us, you have all of the data (repeated below) to enable you to calculate the ROWC ratio for the Carphone Warehouse ... do that and interpret what you find. Consolidated Profit and Loss Account 31 March 2001 25 March 2000 £'000 £'000 Profit before interest and taxation 45,012 25,300 Total Fixed Assets 396,175 100,279 Net current assets (liabilities) 93,180 -2,660 ROWC For the Carphone Warehouse 31 March 2001 Profit before Interest and Tax Working Capital ___________ = _____% 25 March 2000 Profit before Interest and Tax Working Capital ___________ = _____% You will find this additional information of use for your analysis: Carphone Warehouse Consolidated Balance Sheet 31 March 2001 25 March 2000 Current assets £'000 £'000 Stock 52,437 51,842 Debtors due within one year 149,200 82,826 Short-term investments 46,374 11,144 Cash at bank and in hand 67,517 25,348 Total Current Assets 315,528 171,160 Creditors: Amounts fallin...

We'll use the Carphone Warehouse's results to demonstrate these new ratios. Consolidated Profit and Loss Account 31 March 2001 25 March 2000 £'000 £'000 Profit before interest and taxation 45,012 25,300 Total Fixed Assets 396,175 100,279 Net current assets (liabilities) 93,180 -2,660 Fill in this table and calculate the ratio values: ROFA For the Carphone Warehouse 31 March 2001 Profit before Interest and Tax Fixed Assets ___________ = _____% 25 March 2000 Profit before Interest and Tax Fixed Assets ___________ = _____% Did you get this ? A large difference between the results for the two years; 2001's performance was just less than half of 2000's result. We are assessing the efficiency of fixed assets and 25% is probably respectable. However, 11% is another matter and suggests a major change in efficiency between the two years. Let's look at some other figures from the accounts that should help to explain what has happened to make t...

We'll use the Carphone Warehouse's results to demonstrate these new ratios. Consolidated Profit and Loss Account 31 March 2001 25 March 2000 £'000 £'000 Profit before interest and taxation 45,012 25,300 Total Fixed Assets 396,175 100,279 Net current assets (liabilities) 93,180 -2,660 Fill in this table and calculate the ratio values: ROFA For the Carphone Warehouse 31 March 2001 Profit before Interest and Tax Fixed Assets ___________ = _____% 25 March 2000 Profit before Interest and Tax Fixed Assets ___________ = _____% Did you get this ? A large difference between the results for the two years; 2001's performance was just less than half of 2000's result. We are assessing the efficiency of fixed assets and 25% is probably respectable. However, 11% is another matter and suggests a major change in efficiency between the two years. Let's look at some other figures from the accounts that should help to explain what has happened to make t...

First some advanced Rate of Return equations: Return on Fixed Assets (ROFA) = PBIT * 100 Fixed Assets Return on Working Capital (ROWC) = PBIT * 100 Working Capital In addition to the ROCE and ROTA ratios, there are other ratios that will help us to appreciate the efficiency with which the management is using its resources. Here are two ratios that help us with this further analysis. Remember that with the ROTA we used PBIT for our numerator (that's the number on the top of the formula). We use the same measure of profit for the Return on Fixed Assets (ROFA) and the Return on Working Capital (ROWC). Let's have a look. Source: http://www.bized.co.uk/

First some advanced Rate of Return equations: Return on Fixed Assets (ROFA) = PBIT * 100 Fixed Assets Return on Working Capital (ROWC) = PBIT * 100 Working Capital In addition to the ROCE and ROTA ratios, there are other ratios that will help us to appreciate the efficiency with which the management is using its resources. Here are two ratios that help us with this further analysis. Remember that with the ROTA we used PBIT for our numerator (that's the number on the top of the formula). We use the same measure of profit for the Return on Fixed Assets (ROFA) and the Return on Working Capital (ROWC). Let's have a look. Source: http://www.bized.co.uk/

Return on Capital Employed Revisited There is a ratio analysis approach called the du Pont Technique or the Pyramid of Ratios Technique. We are not going to look at the whole pyramid technique and there is nothing new in it in terms of the ratios we might use; but it does contain an interesting feature. Here are the top two levels of the pyramid ROCE is called the Primary Ratio because it is at the top of this pyramid. Moreover, every ratio in this pyramid feeds up into this primary ratio, along these lines: ROCE = Profit for the year margin x Capital Employed Turnover These relationships are very useful and we can see this better when we write the formulae out in full: Return on Capital Employed (ROCE) = Profit for the Year * 100 Equity Shareholders' Funds and ROCE = Profit for the Year Margin = Profit for the Year * Capital Employed Turnover = Turnover Turnover Equity Shareholders' Funds Notice how we use the name capital employed for the eq...