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Receivables Turnover Ratio Essay

For the purpose of the calculation of the turnover ratios the revenue figure including the duty has been taken into account. Here also usually the credit sales alone can be taken into account. However the calculation on the total sales also indicates the relative usage. The ratio for the year 2006 is at 10. 94 indicating that the company has a sound collection procedure for the receivables. However the ratio for the year 2005 was still better at 11. 09. 2. Average Collection Period: The average collection period in number of days indicate the company’s total receivable outstanding as a ratio of the total sales.

33. 35 days average collection period for the year 2006 and 32. 90 days for the year 2005 are found to be on the better side. However the ratio will be of use when the average collection period of the other firms in the industry is compared. 3. Inventory Turnover Ratio: The inventory turnover ratio provides the information on the number of times the inventory is turned over on the total sales. Here again the industry standard is to be ascertained to judge the performance of the company on the basis of the inventory turnover ratio.

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The ratio for the year 2006 stood at 2. 34 indicating that the average inventory has been turned 2. 34 times which is better than last year where the company has done 2. 197 times only.

A. Financial Leverage Ratios: The financial leverage ratios indicate the long-term financial stability of the company. 1. Debt Ratio: The debt ratio comparing the total long term borrowings to the total assets of the company is at 0. 410. This implies that 41 percent of the total assets of the company are built on long term debts and borrowed funds. This ratio appears to be on a high side. However there is no major change from the last year figure.

Debt to Equity Ratio: Normally a debt to equity of 2:1 is considered to be an optimum standard of debt equity ratio. In the case of imperial tobacco this ratio stands at 4. 90 for the year 2006. This implies that the long term financial position of the company is not very comfortable. This ratio has even worsened from the last year when the ratio was 3. 936 only. This debt – to – equity ratio is an alarming one. B. Profitability Ratios: These ratios normally indicate the profitability of the company and how efficiently the company has performed in terms of profit maximization and cost minimization.

But the ratios are to be compared with the industry performances to really judge the performance of the company. 1. Operating Margin Ratio: The operating margin ratio takes into account the sales minus the cost of sales and compares it with the sales to present the operating margin performance of the company before making any adjustments for taxation and interest. The ratio for the year 2006 is at 0. 414 implying a 41. 4 percent gross margin for the company.

It has slightly improved over the previous year. 2. Net Profit to Sales Ratio: The net income to sales ratio is 0.271 showing an improvement over the figure of 0. 253 for the year 2005. The ratio for the other companies in the industry is to be compared to judge the performance of the company in this area. 3. Return on Assets: The Net income as expressed as the usage of assets for earning that income. For the year the ratio is 0,120 with a slight change from the last year. The ratio judges the usage of assets over the periods to earn the net income of the company. As the figures for both the years do not deviate much there is no significant change in the usage of assets as compared to the last year.

4. Return on Equity: The return on equity is an important financial ratio as it tells as to how much net income is earned as against the use of the shareholder’s funds. There is an improvement in this ratio as compared to the last year. From 1. 120 for the year 2005 the ratio has improved to 1. 434 in the year 2006 signifying a better return on the equity. Earnings per Share: The earnings per share of the company stood at 122. 20p as on September 2006 as against 108. 6p per share for the year 2005. “Total Shareholder Return 2006 Performance Our total shareholder return was 14 per cent. (2005: 40%)

Total shareholder return is the total investment gain to shareholders, resulting from the movement in the share price and assuming dividends are immediately invested in shares. Adjusted Earnings per Share For the year 2006 the adjusted earnings per share increased by 9 per cent to 122. 2 pence (For the year 2005 112. 2p) (Adjusted earnings per share is adjusted profit after tax attributable to the equity holders of the Company divided by the weighted average number of ordinary shares in issue during the period. This excludes shares held to satisfy employee share schemes and shares purchased by the Company and held as Treasury shares. )” (Imperial Tobacco)

References: BDC Canada ‘Financial Ratio Savvy’ http://www. bdc. ca/en/my_project/Projects/articles/working_capital_ratios. htm? cookie%5Ftest=1 Financial Pipeline ‘Financial Ratio Analysis’ http://www. finpipe. com/equity/finratan. htm Imperial Tobacco http://www. imperial-tobacco. com/files/financial/reports/ar2006/index. asp? pageid=2 NetMBA ‘Financial Ratios’ http://www. netmba. com/finance/financial/ratios/ Appendix 1 Calculation of Key Financial Ratios: The figures taken for calculation are ? Millions The Ratios have been calculated for the year 2005 also which are shown in the second line always.

A. Liquidity Ratios: 1. Current Ratio: Current Assets /Current Liabilities 2161/3002 = 0. 72 2169/2520 = 0. 86 2. Quick Ratio: Current Assets – Inventory/Current Liabilities 2161 – 789/3002 = 0. 457 2169 – 857/2520 = 0. 520 3. Cash Ratio: Cash + Marketable Securities/Current Liabilities 305/3002 = 0. 101 300/2520 = 0. 119 (Current tax assets 13 + Cash and cash equivalents 263 + Derivative financial instruments 29) 44 + 256 + 0) B. Asset Turnover Ratios: 1. Receivables Turnover:

Annual Sales/Accounts Receivable 11676 Revenue /1067 = 10. 94 11229 Revenue/ 1012 = 11. 09 2. Average Collection Period: Accounts Receivable/Annual Sales/365 1067/11676/365 = 33. 35 days 1012/11229/365 = 32. 90 days 3. Inventory Turnover Ratio: Cost of Goods Sold/Average Inventory 1851/789 = 2. 34 1883/857 = 2. 197 Cost of Goods Sold: Raw materials and consumables 648 651 Changes in inventory 9 (3) Employee cost 468 455 Depreciation 103 97 Other operating charges 630 683 Total 1851 1883 C. Financial Leverage Ratios

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