Strategic Planning in the Small Business

Unit 2
HO 2-5 (continued)

Table

2-11

Debt to Assets Ratio

Total Liabilities

Total Assets

Year 4 Year 3

Year 2 Year

1

89,000 114,000

111,800

93,700

260,500 247,800

209,500 178,800

34%

46% 53%

52%

Debt to Equity

Ratio

Total Liabilities

Total Stockholders

Equify

Year

4 Year 3

Year 2 Year 1

89,000 114,000

111,800

93,700

171,500

133,800 97,700

85,100

52%

85% 114%

110%

question.

In short, these ratios

give a quick, bottom line

picture

of the firm's current

financial results.

Gross Profit Margin The

gross profit margin is

comruted by

subtracting cost of

goods sold from sales and

dividing the result

by sales. This ratio indicates

how the selling activity

provides

the margin to cover

operating costs and leave

a balance of

profit. This is reported

on the comparative percentage

state­

ments. (Table 2-5)

Return on Total

Assets The return on total

assets ratio is cal­

culated by dividing

net income from operations

by average total

assets. This

ratio measures the firm's

operating performance.

In other words,

this figure notes the

rate of return received

for the total investment

made by creditors

and owners. Waverly

Custom Jewelers,

as seen in Table

2-12, shows improvement

in years three

and four as compared

to years one and two.

While

total assets have grown,

net income has increased

at a

faster

rate. Additional funds

from incurring long-term

debt

ChapterTwo

InternalAnalysis 71

214