Question

what does an increase or decrease in the following ratios have on the value of a firm:

1. Cost of goods sold to sales

2. SGA to Sales

3.Gross Profit Margin

4. Asset Turnover

5. Days Sales Outstanding

6.Days sales of Inventory

7. Days Payable Outstanding

8. Inventory Turnover

9.Current Ratio

Answer 1

1)

If COGS to sales increase, then Cash flows decrease and the value of the firm will decrease. Vice versa will increase the value.

2)

If SGA to sales increase, the cash flows decrease and the subsequent firm value will decrease. Vice versa will increase the value

3)

If Gross Profit Margin increase , then cash flows increase and the firm value will increase

4)

If Asset turnover increase, then the efficiency of assets to be converted into cash increases thereby increasing the firm value

5)

If days sales outstanding increase, then cash flows will decrease and the value will decrease

6)

If Days sales of inventory increase, then the cash flow will decrease as more number of days are now required to convesrt inventory into receivables and hence the value will decrease

7)

If Days payable outstanding increase, then more cash is with in the firm and hence more value for the firm.

8)

If Inventory turnover increase, then the efficiency with which the inventory gets converted to receivables and cash increases and as a result the firm value will increase.

9)

IF Current ratio improves, then there will be less cash locked up in operating capital and the firm value will increase