Strategic Planning in the Small Business

Unit 2

HO 2-5 (continued)

behaviors of customers. Since cash flow is being affected, care­

ful monitoring and understanding of this ratio can be quite

important. Waverly Custom Jewelers has experienced

consid­

erable lengthening of collection period. Despite

their good li­

quidity ratios, this may be

a danger signal.

Leverage Ratios

These ratios indicate

the extent to which the firm's capital is

secured through internal (owners or stockholders)

or external

(lenders) means. These figures become quite critical when

undergoing

growth or expansion. Here, the ability to raise

further capital may be affected by the present leverage position.

Debt to Assets Ratio

The debt to assets ratio is a measure of the percentage of assets

that are funded through debt. A ratio that

is too high may be

risky while one that is too low may indicate

inefficient use of

capital. Using total liabilities divided by total assets, the sample

company shows a healthy sign of decreasing percentage (Table

2-11).

As noted earlier, this firm may be in a position to pay

out cash or to enlarge their investment in non-current assets.

A similar conclusion may be reached by using the next ratio.

Debt to Equity Ratio The debt to equity ratio is computed by

dividing total debt

by total owners equity. This ratio indicates

the extent to which operating funds have

been generated by

the owners. For Waverly Custom Jewelers, this is also shown in

Table 2-11.

ProfitabilityRatios

A final set of

ratios are concerned with measuring the firm's

financial performance and financial returns. These ratios are

important,

both from an industry comparison and an internal

trend perspective. Particularly significant deviations from

stan­

dard or

strong negative movements in the internal trend may

signal that the economic viability of the business is in serious

70 PartOne The Analysis Phase

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