Financial Analysis of Current Position of Jools Furniture - Assignment Example

The Chairman A.N. Consultant An Analysis of Jools Furniture 11 April Report An analysis of the Current Position of thecompany’s Jools Furniture 1 Financial Performance The Income Statement shows the financial performance of a business for a given period; usually a year. It indicates whether the business has made a profit or a loss. The Statement of Financial Position as the name suggests indicates the financial position of the business in terms of it assets, liabilities and equity capital. This section provides a brief analysis of the company by looking at some important ratios and provides an explanation of their importance as financial measures 1. 1 Profitability Ratios “It is impossible to assess profits or profit growth properly without relating them to the amount of funds (capital) that were employed in making the profits. The most important profitability ratio is therefore return on capital employed (ROCE), which states the profit as a percentage of the amount of capital employed” (BPP 2009). Profitability ratios are usually calculated in order to perform vertical analysis or to compare one year with another. These ratios include net profit margin and gross profit margin, return on capital employed (ROCE), earning per share (EPS) and price earning (P/E) ratio. The net profit margin, gross profit margin and ROCE are the only ones that are relevant for this exercise. The calculations for the four divisions are shown in Table 1 in the Appendix. Profitability The ROCE may be used to assess how well the management of the divisions have performed (BPP 2009, p. 306). Two ratios may be used to help explain ROCE. They are profit margin and asset turnover. These ratios are described as secondary ratios while ROCE is described as a primary ratio. Profit margin is calculated under profitability while asset turnover has been included with efficiency ratios. ROCE can be used to determine whether the divisions are getting value for money from borrowings to make it worthwhile. Quality Products Division The figures for ROCE suggest that there have been consistent improvements over the three year period. The figures have increased from a negative 6.9% return to a 7.7% return in 2008 and a 9% increase in 2009. However, management indicates that the division needs to achieve a 10% return on investment (ROI) and it is currently below that level. The figures also indicate that the profit margin of the Quality Products Division has improved over the past years from a negative 5.7% in 2007 to 5.7% in 2008 and 6.4% in 2009. The gross profit margin has also increased consistently from 38.9% in 2007 to 40.4% in 2008 and then to 41.4% in 2009. Kitchen Division There was a significant decline in the ROCE from 16.9% in 2007 to 11.9% in 2008, followed by and small decline to 11.4% in 2009. This is above the 10% ROI that the division needs to achieve. There have been inconsistencies in the profit margin over the period. The profit margin declined from 5.3% in 2007 to 3.6% in 2008. However, there was a marginal increase to 3.9% in 2009. The gross profit margins for the period declined from 39.2% in 2007 to 36.2% in 2008 and increased to 37.6% in 2009, which is not consistent with the changes in net profit. This was due to a more than proportionate increase in cost of sales. Bedroom Division The ROCE declined from 11.8% in 2007 to 11.2% in 2009. This is above the 10% ROI required by management. However, the profit margin is very small even though it increased from 3.5% in 2007 to 4.1% in 2008 and declined to 4% in 2009. This was in spite of the consistent decline in turnover. The gross profit margin increased from 26.4% in 2007 to 31.4% in 2008 and a decline to 29.8% in 2009. This was so because the ratio of cost of sales to turnover was proportionately higher in 2007 then in 2008 and 2009. Office Division The ROCE declined for 14.2% in 2007 to 11.2% in 2008. However, it improved during 2009 to 12.5%. These percentages are above the ROI of 10% required by the management. There was a decline in the profit margin from 6.45% in 2007 to 4.7% in 2008 and an increase to 4.9% in 2009. This was so even while turnover increased consistently over the period. The gross profit margin declined from 38.9% in 2007 to 33.6% in 2008 and an increase to 37% in 2009 even though there was a consistent increase in turnover during the period. The difference in movement relates to the disproportionate changes in cost of sales. 1.2 Efficiency ratios Efficiency ratios indicate the ability of management to manage the resources that have been allocated to operate the business. The calculations can be found Table 2 in the Appendix. Quality Products Division The ROA for the Quality Products division increased from (12.7%) in 2007 to 2.8% in 2008 and then to 4.8% in 2009. These returns are rather low and suggest that the assets are not operating efficiently. The asset turnover suggests that the efficiency in the use of the asset has been improving. However, it is not being used as efficiently as it can be. Kitchen Division The Kitchen Division shows better ROAs for the period. However, ROA declined from 21.1% to 14.3% and then increased to 16% in 2009. The inconsistencies in efficiency levels were as a result of acquisitions of fixed assets in 2008. The net increase over 2007 was approximately ?90,000 (?1,320,976 - ?1,230,740). The asset turnover has shown consistent increases, though not significant. However, this has not led to any improvements in profitability and therefore suggests that there was a significant decline in profits in 2008. Bedroom Division The ROA increased from 17.32% in 2007 to 18.7% in 2008 and declined to 17.8% in 2009. This was so even though fixed assets increased from ?968,027 in 2007 to ?1,094,511 in 2008 suggesting increased depreciation charges. This implies, therefore, that the increase in ROA for 2008 is related to significant increases in profit before tax. The asset turnover declined consistently from 7 times in 2007 to 5 times in 2009. The asset turnover seemed to have impacted significantly on ROCE as profit margin increased, though insignificantly in 2009. This suggests that assets are utilized at fairly efficient levels. Office Division The ROA declined from 13.8% in 2007 to 12.4% in 2008 and increased to 13.9% in 2009. This was so while there were consistent increases in fixed assets during the period. The asset turnover remained fairly static at 2 times during the period. 1.3 Liquidity ratios Liquidity ratios indicate how well the working capital of the business is being managed. It also indicates whether the business will be able to pay debts as they fall due (Brigham and Ehrhardt 2005, p. 444). This analysis looks at the current ratio, quick ratio, stock turnover, debtor days and creditor days. The calculations can be found in Table 3 in the Appendix. Current and Quick assets ratios The current ratio is the ratio of current assets to liabilities. This ratio indicates whether the business will be able to pay its debts as they fall due. Since inventories are generally the least liquid of a business’s current assets, they are the current assets on which the business is most likely to suffer the most losses in a bankruptcy. Therefore it is extremely importance to have an idea of the business’s ability to pay current liabilities without relying on the sale of inventories. The quick assets ratio provides this measure. Quick assets are equal to current assets less inventories. A quick ratio of 1:1 is usually considered safe. Quality Products Division The current ratio was 1.13, 1.09 and 1.33 for the years 2007, 2008 and 2009 respectively. These ratios are not healthy and the quick or acid test ratio indicates that the business would not have been able to settle its current liabilities in any of the three years if the business went bankrupt. The stock turnover in days was 104, 99 and 113 days for the years 2007, 2008 and 2009 respectively. This indicates that the business holds stock for an average of over 3 months worth of sales at any one time and suggests that too much funds are tied up in inventory. The Quality products division should seek to reduce the amount of inventory they hold at any one time to about 30 days as it may have implications for storage and is suggestive of overtrading. The Quality Products Division appears to have some problems managing debtors as the number of days sales held by debtors declined from 43 days in 2007 to 27 days in 2008 and increased to 42 days in 2009. This suggests that except for 2008 debtors were holding close to 1.5 months of sales. The creditor days has shown consistent decreases from 50 days in 2007 to 36 days in 2009. This indicates that there were some difficulties with making payments. However, there are signs of improvement. Kitchen Division The current ratios for the period ranged from 1.52 to 2.02. The quick asset ratios are not looking healthy and the only one that shows any sign of withstanding a crisis is that for 2009 which shows a 0.99:1 ratio. The stock turnover periods were 63, 59 and 70 days for the years 2007, 2008 and 2009 respectively. This means that on average 2 months sales are held in inventory at any one time. This is by any standard still too high even though it is managed much better than the Quality Products Division. The debtor days for the Kitchen Division increased from 30 days in 2007 to 31 days in 2008 and then to 37 days in 2009. This shows inefficiencies in the management of debtors. The number of days needs to be brought back to a maximum of 30 days which is considered tolerable. The creditor days declined from 32 days in 2007 to 24 days in 2009 this is considered favourable. However, this depends on the credit period allowed by the supplier. Bedrooms Division The current ratios for the three years ranged from 1.17:1 to 1.27:1. This is poor and is further supported by the quick ratios which show that the Division does not have the ability to withstand a financial crisis. The quick ratios ranged from 0.5:1 in 2007 to 0.59:1 in 2009. The stock turnover days were 45, 51 and 61 days for the years 2007, 2008 and 2009 respectively. This shows deterioration in the management of stock from a holding period of 1.5 months in 2007 to 2 months in 2009. The debtor days has increased consistently from 45 days in 2007 to 51 days in 2008 and then to 61 days in 2009. That is an increase from 1.5 months to 2 months. This is a cause for concern and indicates how poorly debtors are being managed. This also has serious implications for the Division’s ability to pay debts as they fall due. Creditor days increased from 58 days in 2007 to 92 days in 2009. This is a worrying sign as it appears that the company is using creditors to finance the business. Even though it is cheaper than obtaining a loan, the business may have problems later to secure raw material supplies on credit. Office Division The Office Division is pretty similar to the others with current ratios ranging from 1.31:1 in 2007 to 1.49:1 in 2009. While the current ratio showed consistent increases the quick ratio showed consistent declines from 0.73:1 in 2007 to 0.69:1 in 2009. It also suggests that the Office Division will have difficulties paying debts as they fall due. The stock turnover days of the Office Division suggests that there was a much better management of stock as the holding period declined consistently for 50 days in 2007 to 42 days in 2008 and then to 39 days in 2009. This indicates that management is consciously trying to reduce the amount of funds tied up in inventories but there is still a far way to go. The Office Division appears to be controlling its debtors well as the number of days sales that is owing has consistently improved from 29 days in 2007 to 21 days in 2008 and 18 days in 2009. This shows that management is exercising control over its debtors. Creditor days declined from 72 days in 2007 to 45 days in 2008 and increased to 49 days in 2009. Obviously the business made some attempts to reduce the payment period but management may need to manage inventories better and only purchase when it is necessary. 1.4 Financial Structure Financial structure ratios indicate how the business is financed. These ratios include gearing and interest cover ratios which indicates how debt is managed. The gearing ratio is concerned with how much a company owes in relation to the total capital it has employed. If the company is heavily indebted then it will be difficult to obtain loans. A heavily indebted company generally has little or nothing left to pay dividends to shareholders after paying interest, if profits are modest. The interest cover indicates whether the business is earning sufficiently to pay interest expenses comfortably (BPP 2009). The calculations can be found in Table 4 in the Appendix. Quality Products Division The Quality Products Division is highly geared showing fairly consistent figures of a little over 60%. This indicates that the business may not be able to secure funds. This is because the business that was acquired in 2004 was financed solely by debt. Interest cover is poor but there are signs of improvement from coverage of 1 time in 2007 to 2 times in 2009. Kitchen Division Gearing increased from a minor 8% in 2007 to 11% in 2008 and declined to 9% in 2009. The interest bearing debts for the division increased during 2008. The Kitchen Division seemed to have been dependent on bank overdrafts and short term loans. The interest cover is fairly high, declining from 14 times in 2007 to 10 times in 2009. All indications are that the division should be able to secure additional loans as its financial structure indicates that it can afford to. Bedrooms Division Gearing ratio has fallen from 35% in 2007 to 23% in 2009. This coupled with interest cover of 5 times should augur well for the company if it needs to secure funds. Office Division The Gearing ratio has declined from 15% in 2007 to 7% in 2009 while interest cover has improved from 7% in 2007 to 64% in 2008 and then to 135% in 2009. The Office Division did not have any long term loans. The figures were calculated using figures for short term loan and overdraft. 2.0 Evaluation of the Current Role of Finance Director The Finance Director appears to be pretty laid back. This is a manufacturing business and a lot is required of him. There seem to be no real management accounting system in place or any real practical performance standards. While the financial statements as presented are useful there are some serious problems with historical data which can be used to assess the past and to help somewhat with planning. In order to manage the business units better a management accounting system needs to be put in place. The Finance Director will have a better understanding of how to control costs and inventories using various costing systems as well as JIT system of purchasing where necessary. In so doing less funds will be tied up in inventory. The literature on management accounting underscores the importance of performance management and how the systems play an important role in the financial success of the organisation (Drury 2004). Management accounting systems ideally provides information regarding all aspects of an organisation’s transactions; by covering all spectrums of the organisation they represent an important source of information for decision making (Hiromoto 1988). There appears to be no emphasis on budgeting and the preparation of budgets and other tools used in management accounting that allow managers to make decisions in order to achieve organisational objectives. 2.1 Budgeting as a management tool Budgeting is the process by which targets are set for goal attainment. It is described generally as the key to financial management and is used to monitor and control performance of various departments in the organisation. The functions of budgeting are numerous. BPP (1998) lists the functions of budgeting as: ensure the achievement of the organisation’s objectives compel planning communicate ideas and plans coordinate activities provide a framework for responsibility accounting establish a system of control motivate employees to improve their performance A master budget is very useful in linking the various departments in an organisation to organisational goals. Horngren et al (2000, p.197) states: The master budget summarises the financial projections of all the organisation’s budgets and plans. It expresses management’s comprehensive operating and financial plans – the formalised outline of the organisation’s financial objectives and their means of attainment. Budgets are tools that by themselves are neither good nor bad. How managers administer budgets is the key to their value. When administered wisely, budgets compel management planning, provide definite expectations that are an appropriate framework for judging subsequent performance, and promote communication and coordination among the various subunits of the organisation. There are many different styles of budgeting as there are different styles of management. They include activity based budgeting, zero based budgeting and Kaizen budgeting. Just to name a few. Zero Based Budgeting (ZBB) starts from the premise that no costs or activities should be included in the plans for the coming budget period, for the sole reason that they were included in the costs or activities for the current or previous periods. Instead, everything that is to be included in the budget needs to be carefully considered and justified.(cipfa.org n.d.) The Japanese use the word kaizen for continuous improvement. According to Horngren et al (2000 p191) “Kaizen budgeting is a budgetary approach that explicitly incorporates continuous improvement during the budget period into the budget numbers… A Kaizen budgeting approach would incorporate continuous improvement into labour hours or possibly variable manufacturing costs during a period.” Activity-based budgeting focuses on the budgeted cost of the activities that are necessary to produce and sell products and services. It typically requires more detailed information than budgeting which is based purely on output-based cost drivers” Horngren et al (2000). Drtina et al (1988) in their study gave an example where a furniture manufacturer operating both in the USA and Canada used a continuous three-month budget cycle. According to Drtina et al (1988) the budget has become an integral planning and control device for achieving two strategic objectives. These objectives are ongoing new product and service development and rapid continuous improvement which is similar of kaizen budgeting. Continuous improvements allow for continuous reduction in costs as well as elimination of activities that is non-value creating. This is one aspect of strategic management accounting. 2.2 General Criticisms of Financial Performance Measures Performance measures serve an important role, as a means of allowing managers to track and measure performance for their divisions (Anthony and Govindarajan 2001). As noted in Section 1 financial measures are used to provide financial information for managers and other users as well as to assess efficiency and effectiveness. Ittner and Larcker (2003) states that: some of the most popular measures are ROCE, ROA, ROI and EPS. However, it is suggested by some writers/researchers that they are limited in scope. Furthermore, BPP (2009, p. 306) points out that an underlying principle in computing ratios is that we must compare like with like so if capital employed include shareholders equity and debt we must include profits earned by all debt capital, therefore we use PBIT. However, if we are just using shareholders funds then we use PBT since interest is a return to lenders and is deducted before arriving at amounts attributed to shareholders. In the formula suggested for ROI no debt was included but the interest that was used is PBIT. This formula would have been used to determine whether targets were attained by the Divisions. This would mean that divisional managers would get more bonus than they are actually worth. This also implies that the Finance Director is not as focused as he should be in terms of paying out bonuses on profits that the Divisions are not making. A calculation of ROI revealed that they were significantly higher than ROCE calculated in Section 1. We are speaking of ROI of (15%), 16.2% and 19% for the years 2007, 2008 and 2009 respectively for the Quality Products Division. The figures for the Kitchen Division were between 13% and 18%, and 15% and 18% for the Bedroom Division and 12% and 16% for the Office Division. This would imply that the Divisions would be paying out more than they are actually earning. Several writers including Kaplan and Norton (1996); Ittner and Larcker (1998); Neely (1999); and Banker et al (2000) indicates that financial measures are financially oriented, historical, short term oriented and too internally focused. Kaplan and Norton (1996) also suggests that measurements that uses only financial measures, as with Jools Furniture can impact negatively on an organisation’s capacities and so a combination of financial and non-financial measures are better suited for the evaluation of performance. Even though there seemed to be a problem with some adjustable chairs in the quality products division, no effort was made to deal with the situation. This could result in loss of sale in the future if customers are not satisfied. Quality and customer satisfaction are key ingredients in any business and managers should be judged on both. Studies done by Anderson and Lanen (1999) and Banker et al (2000) have pointed to the positive impact of measures of non-financial performance on the organisation. Fisher (1995) has given three main reasons for the emergence of non-financial performance measures. They are: the limitations of the traditional measures of financial performance, pressures arising from competition and the growth of other initiatives. Other writers on performance managements have suggested that some of the reasons for the movement away from financial performance measures include increasing competition and changing organisational roles (Neely 1999). There is also the recognition that financial measures do not provide a clear picture of the organisation, as suggested by Bourne and Neely (2002). 2.3 Criticisms of Budgeting In addition to the criticisms levelled at financial measures generally, budgeting in particular has come under increased criticisms. Antos and Brimson (1999, p 9) states that: that traditional planning and budgeting focuses on resources rather than activities, which are central to value creation. Jenson (2001) believes that corporate budgeting is a joke and supports Bart (1988) in terms of his views on gamesmanship. Studies carried out by Jenson (2001) revealed that budgeting was a waste of time which forces mangers to sit through meetings that were basically dull with tense negotiations and encouraged dishonesty which resulted in managers setting low targets which they already knew were achievable in order to inflate results. It is obvious that this could happen at Jools Furniture because of the un-businesslike attitude of the Finance Director and the laissez-faire environment in which they work. 2.4 Strategic Management Accounting for Competitive Advantage Tillmann and Goddard (2008, p. 80) states that: companies survival in today’s highly competitive global markets may depend partly on a management accounting functions that allow for the successful assessment of strategic situations, for which strategic management accounting (SMA) can provide such a function. Globalisation has brought with it increased challenges and so it was thought to be increasingly important to develop not only a strategic and long term focus but also to place organisations in a competitive position to enable global expansion. Bromwich (1990) stressed the importance of this when he emphasised the need to take management accounting up from the factory floor so as to assist in meeting the global challenges in product markets and thus allow management accountants to focus on the organisation’s value added vis-a-vis its competitors. Customers’ desires for products are based on the characteristics or attributes that the products have or provide as Lancaster (1979) indicates. It is therefore important that management accountants ascribe values to these attributes and monitor them over time to determine if they are still relevant to customers’ needs. 2.5 The Balanced Scorecard as a Tool for Multiple Performance Measures Even though the strong competition has placed significant pressure on Jools Furniture, there are things that the Finance Director can do to remain competitive. It could differentiate the product from others by making it more efficient. Things that the customers do not value could be removed in order to reduce cost. In order to implement its chosen strategy it could use the balanced scorecard. The balanced scorecard has evolved, specifically in organizations where it has been most successful to be an integral part of an enhanced strategic planning and management system (Niven, P 2002). The promulgators of this technique - Kaplan and Norton states: “Building a scorecard can help managers link today’s action with tomorrow’s goals.”(qtd. in Young 2004, p. 212). Jools Furniture must therefore decide what to do to succeed financially in the eyes of its shareholders, what to excel at in order to satisfy its customers and shareholders, how to achieve vision through its ability to change and grow. See diagram in Appendix 2. According to Banker et al (2004) the balanced scorecard provide guidelines for selecting multiple performance measures that supplement traditional financial measures with operating measures of customer satisfaction, internal processes and learning and growth activities. The major influence on Jools Furniture pricing decisions are customer, competitors and costs. Increase in customer satisfaction which is a non-financial objective can be translated into higher sales in the future. Employee education and skills level also translates into product quality which further translates into increased profitability and increased benefits for employees. Customer growth is important to the various divisions as it can translate into increased profitability. “Profitability is not a function of customer size; rather, profitability is a function of customer growth rate” (Chase et al 1998, p. 475) Economic value added (EVA) can be computed to answer the question of how to satisfy shareholders in accordance with the financial perspective quadrant of the balanced scorecard (Grove et al 2008, p. 3). According, Grove et al (2008, p. 4) emphasized some guiding principles at the manufacturing company they studied. They include: Simplify and stabilise the process; eliminate non-value added time and waste; relentlessly pursue continuous improvement; find and fix root cause; know your cost; know your customers expectations; make decisions where work is performed; balance and optimise the overall process; and what gets measured gets done. Jools Furniture should consider adopting these guiding principles in order to achieve its goals of profitability, increased market share, and employee and customer satisfaction. 3.0 Assessment of Loan Proposal It is important that an evaluation of possible alternatives be carried out before projects are embarked upon. There are a number of evaluation techniques in use. There is the simple pay back method which allows for a determination of how early the project will be able to pay for itself. The advantage of this method is that it is simple to calculate. A major disadvantage is that it does not take into account the time value of money. Other methods in use that allow for the use of discounted techniques include IRR and NPV. 3.1 Project Appraisal Using NPV The Kitchen Division has submitted a plan and detailed calculation showing an NPV of ?500,000 over a six year planning period, with a 65% probability of realisation and a 25% probability that it will break even. If we combine these two probabilities which do not add up to 1 we would get the following results. NPV Probability Expectations ?500,000 0.65 ?325,000 0 0.25 0 This suggests that there is a 90% chance that the Kitchen Division will earn ?325,000. This means that there is a 90% chance of getting a return of ?325,000/?1,800,000 = 18%. While this may be well above the return on investment (ROI) required by Jools Furniture, there is a 10% chance that there may be substantial losses. The Finance Director needs to ensure that the proper discount rates were used in the calculation. The Finance Director could set up various scenarios on a spreadsheet to also look at possible losses that might be incurred. A set of risks that affect the profitability of the project should be considered. 3.2 Alternative Forms of Financing the Project Two alternative forms of financing the project include securing a mortgage on the property and leasing the property. If mortgage is secured on the property it will involve fixed payments over a number of years. Additionally, there will be restrictions on the property in terms of what it can be used for. The company will not be able to dispose of the asset until the mortgage is fully repaid. If the company has liquidity problems and is unable to pay this may result in fees/penalties being charged in addition to the regular principal and interest payments. A mortgage normally has a maximum of 30 years. In the event of a downturn in business, the company risks losing the property on which the mortgage is secured. Obtaining a mortgage in itself is very costly with legal and other fees involved. An advantage over the loan from the holding company is that there is a longer repayment period. However, it means that the company will be tied much longer with the mortgage than it would be with a five year loan. If the company wants to the option to close the agreement early then it would have to pay up a substantial portion of the interest which is not yet due. The lease option could involve s sale and leaseback arrangement with a financial institution with the option to purchase the property for a minimal sum at the end of a specific point in time. This is usually a fairly good option and does not appear as restrictive as the mortgage. 4.0 Conclusion In finalising this report, I do hope that it will benefit Jools Furniture greatly. References Antos, J & Brimson, J (1999). Driving Value Using Activity-Based Budgeting. New York: John Wiley & Sons Anthony, R.N and Govindarajan, V. (2001). management Control Systems. 10th ed. New York: McGraw-Hill Banker, R.D., Potter, G and Srinivasan, D (2000). An Empirical Investigation of an Incentive Plan that Includes Non-financial Measures. The Accounting Review: 75(1). p. 65-92 Banker, R. J., Chang, H & Pizzini, M. J (2004). 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New Jersey: Pearson Prentice Hall Appendix Table 1 - Profitability Ratios Ratio Division Formula 2009 2008 2007 Profit Margin Quality Products PBIT x 100% Turnover 6.4% 5.7% (5.7%) Kitchen 3.9% 3.6% 5.3% Bedroom 4% 4.1% 3.5% Office 4.9% 4.7% 6.45% Gross Profit Margin Quality Products Gross profit x 100% Turnover 41.4% 40.4% 38.9% Kitchen 37.6% 36.2% 39.2% Bedroom 29.8% 31.4% 26.4% Office 37% 33.6% 38.9% Return on Capital Employed Quality Products PBIT x 100% Capital Employed 9% 7.7% (6.9%) Kitchen 11.4% 11.9% 16.9% Bedroom 11.2% 11.7% 11.8% Office 12.5% 11.2% 14.2% Table 2 – Efficiency Ratios Ratio Division Formula 2009 2008 2007 Return on assets Quality Products PBT x 100% Fixed assets 4.8% 2.8% (12.7%) Kitchen 16% 14.3% 21.1% Bedroom 17.8% 18.7% 17.32% Office 13.9% 12.4% 13.6% Asset turnover Quality Products Turnover Fixed Assets 1.62 times 1.39 times 1.29 times Kitchen 4.56 times 4.37 times 4.24 times Bedroom 5.53 times 5.71 times 6.98 times Office 2.87 times 2.68 times 2.45 times Table 3- Liquidity ratios Ratio Division Formula 2009 2008 2007 Current ratio Quality Products Current assets Current liabilities 1.33:1 1.09:1 1.13:1 Kitchen 2.02:1 1.56:1 1.52:1 Bedroom 1.27:1 1.22:1 1.17:1 Office 1.49:1 1.44:1 1.31:1 Quick ratio Quality Products Quick assets Current Liabilities 0.63:1 0.47:1 0.59:1 Kitchen 0.99:1 0.78:1 0.83:1 Bedroom 0.59:1 0.50:1 0.53:1 Office 0.69:1 0.71:1 0.73:1 Stock turnover Quality Products Average stock x 365 Cost of sales 113 days 99 days 104 days Kitchen 70 59 63 Bedroom 117 days 121 91 Office 39 days 42 50 Debtor days Quality Products Trade debtors x 365 Credit sales 42 days 27 43 Kitchen 37 31 30 Bedroom 61 days 51 45 Office 18 days 21 29 Creditor days Quality Products Trade Creditors x 365 Credit Purchases 36 days 48 50 Kitchen 24 28 32 Bedroom 92 days 65 58 Office 49 days 45 72 Table 4 – Gearing Ratios Ratio Division Formula 2009 2008 2007 Gearing Quality Products Borrowings x 100% Borrowings + Shareholders funds 62% 61% 62% Kitchen 9% 11% 8% Bedroom 23% 30% 35% Office 7% 8% 15% Interest Cover (times) Quality Products PBIT Interest 2 1.5 1.3 Kitchen 10.5 10.5 14.4 Bedroom 5.3 5.8 3.4 Office 135 64 7 Appendix 2 Kaplan and Norton’s Balanced Scorecard Read More