The same Ratio for BVD Which division, LED or BVD uses it assets more effectivel
ID: 2820140 • Letter: T
Question
The same Ratio for BVD Which division, LED or BVD uses it assets more effectively? , , why? Use this information to answer the last two question. All numbers are in millions except the ratios. Income Statement 2014 2015 2016 Sales (Total Revenue 100 Cost of goods sold Depreciation General, sales & admin 70 (GSA) expenses Operating income Taxes Net Profit 110 120 52 20 65 60 50 20 51 20 NOTE: These are COMPANY figures for the company LED is evaluating for acquisition. 47 34 20 10 57 -44 2014 2015 2016 40 10 10 -30 Current Assets Property, plant& equipment Total Assets Current Liabilities Long-Term Liabilities 45 40 100 40 10 50 100100 40 10 50 35 15 50 Equity Total Liabilities& Equity 100 100 00
Explanation / Answer
7. b)Overhead Operating Ratio = Operation Expenses / (Operating Income + Taxable Net Interest Income)
An overhead ratio is a metric that allows companies to evaluate expenses as a percentage of income. In general, a company strives to achieve the lowest operating expenses possible without sacrificing its goods and/or services or competitiveness within the industry. Cutting expenses have a positive effect on the overhead ratio; however, a company must balance these cuts with maintaining the quality of business.
Operating Expense in 2016 = GSA expenses + Depreciation = 60+20 = 80
Operating Income in 2016 = -20
Therefore, Operating Overhead Ratio = 80/-20 = -4. (Very Bad Ratio)
a) The Operating Overhead Ratio of -4 indicates two main conclusions:
1. The operating expenses are as high as 4 times that of the available operating income which shows how less money the target firm holds in its hand for its daily operations. This adverse state might have already led the firm into many inefficiencies.
2. The operating income is negative which indicates that there is zero income available to run the daily operations of the firm. This indicates that the firm is only dependent on the accounts receivables after the completion of its projects which is a very worse scenario.
c) Current Ratio of the target firm = Current Assets/Current Liabilities = 40/35 =1.14- which is better than that of the industry.
Debt Ratio = total liabilities / total assets = 50/100 = 0.5 = 50% - Better than that of the industry
Sales Growth = 120 - 110 / 110 = 9% - Very high when compared to the industry
Considering the above three ratios, the firm actually has huge scope to excel except for its lack of operating income. If a recapitalization is done to make available more cash for operations, the company is going to achieve greater heights.
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