Calculating and Interpreting Operating Profitability Ratios Case Study

Calculating and Interpreting Operating Profitability Ratios Case Study

Calculating and Interpreting Operating Profitability Ratios
Case Study

Champion International Corporation and Kimberly Clark Company are forest products companies. Champion derives the majority of its revenues from the sale of printing  paper and newsprint for a variety of business and publishing needs. Kimberly derives the majority of its revenues from the sale of tissues, diapers, and other personal care products. Champion derives 85% of its revenues from sales within the US. Kimberly derives 67% of its revenues from sales within the US. Data for the two companies follows below:

         (in millions)                                 Year 3       Year 4       Year 5

Champion

Sales                                                       $5,318      $6,972      $5,880

Average Accounts Receivable                  $   528      $   610      $   839

Change in Sales from previous Year+ 4.9%     + 31.1%    - 15.7%

Kimberly Clark

Sales                                                       $11,628   $13,373   $13,149

Average Accounts Receivable                   $  1,385    $ 1,573   $ 1,669     

Change in Sales from previous Year+ 2.9%     + 15%       - 1.7%

Required:

1. Calculate the accounts receivable turnover ratios for Champion and Kimberly for Years 3, 4 and 5.


2. Suggest possible scenarios for the differences in the accounts receivable turnovers for the two firms during the three year period.

Eli Lilly and Merck develop, manufacture, and market prescription drugs worldwide. Merck also provides managed prescription drug programs for various businesses, purchasing drugs in bulk quantities for distribution to health care providers. Lilly derives 56% of its revenues from sales within the US while Merck derives only 30%. Both firms use the same cost flow assumptions for inventories and cost of goods sold.

Required:

1. Calculate the inventory turnover ratio for each firm for Year 5, 6 and 7


2. Suggest reasons for the differences in the inventory ratios of the two firms.


3. Suggest reasons for the changes in the inventory turnover ratios of the two firms during the 3 year period.

                                                             Year 5         Year 6         Year 7

Eli Lilly

Cost of Goods Sold                        $1,680       $1,836       $2,118

Average Inventories                      $1,036       $  904        $  861

Change in Sales from previous Year+ 9.9%    +18.4%      + 8.6%

Merck

Cost of Goods Sold                        $5,962       $7,456       $9,319

Average Inventories                      $1,651       $1,767       $2,011

Change in Sales from previous Year+14.7%   +11.4%      + 18.9%