Ratio Analysis
May 24, 2008
Many managers look at the raw dollar numbers and miss important trends that can highlight growing problems in their operations.
Ratio analysis can identify trends before they have a chance to grow into major problems. Once you identify a problem you can investigate the cause and implement corrective actions.
Income Ratios
|
Qtr1
|
Qtr2
|
Qtr3
|
Qtr4
|
|
| Sales |
1.1M
|
1.0M
|
1.05M
|
1.2M
|
| Cost of Sales % |
45%
|
44%
|
48%
|
50%
|
| Gross Profit % |
55%
|
56%
|
52%
|
50%
|
| Net Profit % |
12%
|
13%
|
9%
|
8%
|
| Administrative Exp % |
12%
|
13%
|
14%
|
15%
|
The problem in the above example is that your gross margin is decreasing. You must investigate to find out why and take corrective actions. Is it caused by the pricing of your titles, excessive production costs, or increasing royalty expenses?
You should also investigate why administrative expenses are steadily increasing as a percentage of sales.
Balance Sheet Ratios
|
Qtr1
|
Qtr2
|
Qtr3
|
Qtr4
|
|
| Days of Inventory |
160
|
180
|
200
|
350
|
| Days of Sales Outstanding |
90
|
89
|
88
|
80
|
| Accounts Payable |
100
|
130
|
150
|
200
|
| Current Ratio |
1.6
|
1.5
|
1.2
|
1.1
|
Activity Statistics
|
Qtr1
|
Qtr2
|
Qtr3
|
Qtr4
|
|
| New Customers |
2400
|
2500
|
3000
|
2000
|
| New Titles |
5
|
4
|
0
|
10
|
| Sales per Employee |
200K
|
190K
|
170K
|
200K
|
A key statistic that we like is new customers per quarter. Ideally you want to see marketing acquiring a targeted number of new customers per quarter.
