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Instructor Blog - Financial Analysis

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Ratios and Messages about Profitability and Cash Flow


  • admin

  • 9/20/2019 11:16:05 AM

  • 1065

  • Financial Analysis
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Q: Where is owner payout on this example?

A: The owner payout rate is defined as the sum distributions and loans to owner divided by reported net profit.

For Buckeye Beverages, Inc. in 2015, the owner payout rate was (($158,253 + $21,553) / ($178,002)) = 1.01

Q: Can I see Slide 33 again – the solutions for Poll Question 3?

A: Poll Question 3 is as follows:

“Based on the Business Driver performance ratios for 2014 and 2015, the most pressing issues to explore with Buckeye Beverages, Inc. are:

  • The outlook for 2016 sales growth.
  • The sustainability of EBITDA % at 3.62%
  • The reasons for the four-day increase in accounts receivable days and any anticipated movement in accounts receivable days in 2016.
  • The reasons for the five-day increase in inventory days and any anticipated movement in inventory days in 2016.
  • The reasons owner payout exceeded reported profit.”

The most appropriate issue to explore seems to be the outlook for sales growth in 2016 since sales usually drives, or influences, virtually all dimensions of a company’s operations. Such focus should reveal, among other things, the expected competitive forces the company faces and how those forces are likely to translate to pressure on sales, prices, gross margins, operating expenses, and operating expenses %.

In addition, an initial focus on sales growth provides information on the likely increases in accounts receivable, inventory, and accounts payable. Flat sales suggest, initially, little movement in the balances of the accounts. But significant sales growth has strong implications for increases in the three accounts and the associated net cash outflows from movements in these three accounts. Such a possibility naturally flows into an examination of the company’s ability to maintain control of accounts receivable days, inventory days, and payable days.

Further, an initial focus on sales growth should raise questions about the course of the owner payout rate. In dollar terms, the owner payout has remained relatively flat in 2014 and 2015. A key question is whether the owner payout varies with sales and net profit or whether it is basically a fixed amount of compensation the owners target for themselves year by year.

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