2) Suds and Duds Laundry washed and pressed the following numbers of dress shirts per week
2a) Calculate the labor productivity ratio for each week
Productivity ratio = Output (shirts)/Input (hours)
Week 1: 68/24 = 2.833
Week 2: 130/46 = 2.826
Week 3: 152/62 = 2.452
Week 4: 125/51 = 2.451
Week 5: 131/45 = 2.911
2b) Explain the labor productivity pattern exhibited by the data
Throughout each week, the work crew either increased in size or worked more hours. However, the labor productivity ratio was around the same as Week 1, as productivity hardly increased. The lowest productive weeks were Week 3 and 4 and that’s when all three were working together.
4) At Symtecks, the output of a specific process is valued at $100 per unit. The cost of labor is $50 per hour including benefits. The accounting department provided the following information about the process for the past four weeks
4a) Use the multifactor productivity ratio to see whether recent process improvements had any effect and, if so, when the effect was noticeable
Multifactor Productivity Ratio = (Units produced * value per unit)/(Labor + Material + Overhead)
4b) Has labor productivity changed? Use the labor productivity ratio to support your answer
Recent process adjustments had slim-to-no effect, as the multifactor productivity ratio ranged from about 2.63 to 2.75. In other words, the relationship between units produced and the costs (labor, material, overhead) associated with it were identical. Also, Weeks 3 and 4 had fewer units produced than Weeks 1 and 2, which resulted in them having the most productive week, as costs weren’t as high as the other weeks.
8) Mariah Enterprises makes a variety of consumer electronic products. Its camera manufacturing plant is considering choosing between two different processes, named Alpha and Beta, which can be used to make two component parts A and B. To make the correct decision, the managers would like to compare the labor and multifactor productivity of process Alpha with that of process Beta. The value of process output for component A and B are $175 and $140 per unit, respectively. The corresponding overhead costs are $6,000 and $5,000, respectively.
8a) Which process, Alpha or Beta, is more productive
Labor productivity of process Alpha and Beta = ((Units produced (A) * value per unit (A)) + (units produced (B) * value per unit (B))/(Labor (A) + Labor (B))
Multifactor productivity of process Alpha and Beta = ((Units produced (A) * value per unit (A)) + (units produced (B) * value per unit (B))/(Total labor and material costs (A and B) + overhead)
8b) What conclusions can you draw from your analysis?
Process Alpha has 20.3 % higher labor productivity rate and Process Beta has 4.85 % higher multifactor productivity rate.
These numbers conclude that Process Alpha was more efficient in converting labor into consumer electronic products than Process Beta. On the other hand, Process Beta considers material and overhead costs, which is more productive than Process Alpha.
I have always been interested in the details of DNA testing, and I was excited to see that Chapter 7 covers this section. This chapter addresses DNA’s chemical makeup, location, and how it is used to identify a person.
While many sources of evidence are used in an investigation (eyewitness testimony, physical and forensic evidence, surveillance footage), DNA is considered one of the most reliable pieces of evidence. Since each person’s DNA is unique (excluding twins), it is extremely unlikely that two people have the exact same DNA profile. As a result, if someone’s blood is uncovered at a crime scene and that person matches the sample, it is almost certain that the person was present at that place.
“DNA stores biological information and serves as the instruction manual from which we are built” (P. 263, 2018). All living organisms (plants, animals, humans) receive DNA passed down from their creators and, as a result, resemble them. DNA is found inside the nucleus of a cell and exists in the form of chromosomes. Since blood, skin, semen, and saliva all contain DNA, these cells can determine whether or not a person is a match. Once either of these samples has been collected, it is then subjected to DNA profiling. The analyzed regions of DNA contain short tandem repeats (STRs), which are blocks of repeated DNA sequences on chromosomes.
Roy Brown was falsely arrested and sentenced for the murder of Sabina Kulakowsi, a social worker. The main argument that convinced the jury to convict Roy Brown was the testimony of a dentist hired by the prosecution. The prosecution wanted to use bite-mark analysis (with error rates as high as 91%) to prove Roy Brown was the perpetrator. Roy Brown didn’t even have the ability to bite Sabina Kulakowsi because he had fewer teeth than what appeared on her body. However, 12 years later, Brown’s lawyers uncovered additional evidence that strongly suggested Brown did not murder Sabina Kulakowsi. They contacted the Innocence Project, whose mission was to “use DNA evidence to free people wrongly convicted of crimes” (P. 262, 2018). Roy Brown’s DNA proved that he wasn’t the perpetrator, and he was released from prison.
In conclusion, reading Chapter 7 has given me a great understanding of what DNA is and how cell samples can be used to exonerate innocent people. Nearly every human cell has its own unique set of DNA, which can effectively match which cell belongs or doesn’t belong to a person. Roy Brown is one of the hundreds of people who have had their lives restored by DNA testing, which has proven to be a more effective investigation method than outdated practices such as the bite-mark analysis. Hopefully, more investigations will prioritize the use of DNA testing so each case is fairly evaluated and decided on.
Shopden’s mission is to save people time and money on their shopping trips. Shopden, a list-sharing and budgeting mobile application with location/time-based notifications, effectively addresses the three most significant problems people face when shopping: (1) Overspending at stores, (2) Forgetting to buy specific items, and (3) Miscommunicating with the people you’re buying items with/for. Shopden aspires to be the go-to solution for every budget-conscious shopper seeking a user-friendly and efficient approach to shopping.
Unfortunately, many people lack the time and resources to track their monthly shopping expenses. As a result, shoppers spend over $300 per month on impulse purchases (CNBC). Not to mention, approximately half of shoppers come home regularly without the items they intended to buy (Independent). These problems lead to shopping debt, food and packaging waste, and task delays.
Shopden’s collaborative shopping lists ensure people plan their trips to stores ahead of time and can track what has or hasn’t been purchased. Instead of buying impulsively, people can make informed decisions based on their budget and shopping needs. Shopden users can customize their notifications based on what times they’d like to go to a store and when they’re within a certain proximity of a store they tend to shop at. These notifications reduce forgetfulness and save people time making unnecessary trips to stores. Shopden’s expense tracking features also allow people to set monthly spending limits and easily view their spending breakdown by each category (i.e., groceries, electronics, and hygiene products).
Shopden will generate revenue through our paid subscription plan and posting relevant advertisements. All users are offered a 30-day free trial to access all of Shopden’s features. Following the trial period, users can opt for the subscription plan at $3.99 per month or $39.99 annually. Shopden also provides a free plan with limited features for users who prefer basic list-sharing and budgeting capabilities. Free users will also encounter advertisements related to stores and shopping-related offers, not intrusive ads unrelated to shopping.
Shopden is seeking $20,000 to launch its marketing campaign. Shopden will put these funds towards enhancing its visbility on Google Play/App Store and Google Search Engine (ASO and SEO). A balanced approach of organic growth and paid advertisements that improves our engagement on these platforms ultimately attracts more users. Based on surveys, interviews, and online research, I project 1,000 active users (300 paying subscribers) in Shopden’s first year, generating an expected monthly revenue of $1,200. While it depends on investor preferences, Shopden’s exit strategy is to be acquired by a larger technology company in retail or consumer services.
This week’s reading covered how to analyze capital expenditures and how to outline a proposal for a new investment.
Capital expenditures are large projects that require a significant investment of cash. At the company I work at, we classify capital expenditures to be $5,000 or more. The three key concepts to analyze capital expenditures are future value, present value, and required rate of return.
Future value is what a given amount of cash will be worth if it’s loaned out or invested. For example, if I plan on giving money to an investor, I need to consider the percentage of earnings he can generate for me. If earnings were 2%, I’d be better off keeping my money in a bank since it offers a higher return and is a much safer investment. If earnings were 8%, I’d be much more likely to invest with him, even if more risk is associated.
Present value is the reverse of future value, as it is commonly used in evaluating investments in equipment, real estate, and M&A. To determine the present value, you must consider what kind of interest rate should be used to discount that future value.
The required rate of return is the rate people require before they will invest. It’s essential to consider the opportunity cost and cost of capital when making an investment. Interest rates and the stock market have an inverse relationship. When interest rates fall, people are more inclined to borrow money to purchase assets (stocks, cars, homes, etc.). When interest rates rise, people are less likely to borrow money since they have to pay more on interest, which gives bonds a higher return on investment.
When preparing a proposal for an investment, it is important to follow these steps.
(1) Collect all data about the investment costs (purchase price, shipping costs, taxes, installation, debugging, training, etc.). (2) Determine the benefits of the new investment. (3) Find out the company’s hurdle for this kind of investment by calculating the project’s net present value. (4) Calculate payback and internal rate of return.
Calculate the following ratios and filled in the worksheet for ratios. You must show your work.
*(I show all my work for my answers in highlight for each question, and then I put all the answers in the Ratio Table on the last page)*
LIQUIDITY RATIOS:
Net working capital for Walgreens
Net working capital for CVS
NWC Formula = Current Assets – Current Liabilities
(Cash + A/R + Inventories + other current assets) – (Short term debt + Trade A/P + Operating Lease obligation + Accrued expenses and other liabilities + Income taxes)
Analysis: What do the results of this calculation mean in the context of Walgreens? In the context of CVS? Compare the two – why are they different? Which is better or worse?
Walgreens’s NWC decreased approximately 27% from 2019 to 2020, mainly due to its overall drop in revenue and new operating lease obligation. CVS’s NWC drastically decreased by approximately 350% from 2018 to 2019, mainly due to increased accrued expenses and all A/P costs. Walgreen’s reason for its decrease in NWC differs from CVS’s reason since Walgreen’s biggest liability increase is in its loan, while CVS has many liability increases stemming from its A/P and accrued expenses. Even though Walgreens’s -$9 billion NWC is lower than CVS’s -$3 billion NWC, I think CVS is worse because they have more areas to address for its drastic increase in current liabilities. Walgreens increased current liabilities simply stem from investing/growing.
Must be at least four sentences for the above analysis.
B. Current ratio for Walgreens Current ratio for CVS
Current Ratio Formula = Current Assets/Current Liabilities
Walgreens Current Ratio (2019) = 18,700/25,769 = .7257 = 72.57%
Walgreens Current Ratio (2020) = 18,073/27,071 = .6676 = 66.76%
CVS Current Ratio (2018) = 45,243/44,009 = 1.028 = 102.8%
CVS Current Ratio (2019) = 50,302/53,303 = .9437 = 94.37%
What does the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
CVS’s higher current ratio means they have a greater ability to pay its short-term debts with its short-term assets. However, even though CVS’s ratio/percentage is closer to 100% than Walgreens, it does not necessarily mean that CVS is a “healthier” company. In the previous problem, Walgreens’s decrease in NWC was resulted from a loan. Walgreens is taking measures to grow its company. CVS’s decrease in NWC was resulted from many A/P factors, which is more complex than taking out a loan.
C. Quick ratio for Walgreens Quick ratio for CVS
Quick Ratio Formula = (Current assets – Inventory)/Current liabilities)
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
CVS’s higher Quick Ratio means they have a greater ability to meet its short-term financial obligations without relying on the sale of inventory. Instead of focusing on inventory, quick ratio focuses on assets that can be easily converted into cash, which is a more conservative measure of liquidity. CVS is less reliant on its inventories than Walgreens, as CVS’s inventories make up a little over 1/3 (17,516/50,302 = .35 = 35%) of its assets while Walgreens inventories make up approximately 1/2 (9,451/18,073 = .52 = 52%) of its assets. Similar to Current Ratio, 100% or greater is ideal.
PROFITABILITY CALCULATIONS:
D. Gross profit $ and gross profit % for Walgreens Gross profit $ and gross profit % for CVS
Gross Profit = Total Revenues – COGS
Gross Profit % = (Revenue – COGS)/Revenue
Walgreens Gross Profit and Gross Profit % (2018)
= $30,792 (in millions), so $30.8 billion
= (30,792)/(100,745) = .3056 = 30.56%
Walgreens Gross Profit and Gross Profit % (2019)
= $30,076 (in millions) , so $30.1 billion
= (30,792)/(106,790) = .2883 = 28.83%
Walgreens Gross Profit and Gross Profit % (2020)
= $28,017 (in millions), so $28 billion
= (28,017)/(111,520) = .2512 = 25.12%
CVS Gross Profit and Gross Profit % (2017)
= 184,786 – 153,448 = $31,338 (in millions), so $31.3 billion
= (184,786 – 153,448)/(184,786) = .1696 = 16.96%
CVS Gross Profit and Gross Profit % (2018)
= 194,579 – 156,447 = $38,132 (in millions), so $38.1 billion
= (194,579 – 156,447)/(194,579) = .1960 = 19.6%
CVS Gross Profit and Gross Profit % (2019)
= 256,776 – 158,719 = $98,057 (in millions), so $98.1 billion
= (256,776 – 158,719)/(256,776) = .3819 = 38.19%
What do the results of this calculation mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
Gross profit solely focuses on the profitability of its core operating activities relating to its products or services sold. In other words, this metric only accounts for the revenue and costs associated with CVS and Walgreens products and services. Over a three-year period, CVS recorded a bigger total Gross Profit while Walgreens recorded a higher percentage of Gross Profit. CVS’s wider reach of selling its products and services is the result of having a bigger total Gross Profit, while Walgreens was able to manage its COGS more effectively, which resulted in a better percentage of Gross Profit.
CVS Debt Ratio (2018) = (137,913)/(196,456) = .7020 = 70.2%
CVS Debt Ratio (2019) = (158,279)/(222,449) = .7115 = 71.15%
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
Debt ratio is a metric to measure how much of the company’s assets are financed by debt. The higher the ratio, the more debt is used. Both CVS and Walgreens have a debt ratio hovering around 70%; however, CVS has a much higher percentage of long-term debt (64,699/158,279 = .4088 = 40.88%) compared to Walgreens (12203/66039 = .1847 = 18.47%). This statistic means that CVS is investing more in its future than Walgreens, whether it loans or lease obligations.
ASSET MANAGEMENT RATIOS
F. Accounts receivable turnover ratio for Walgreens Accounts receivable turnover ratio for CVS
A/R Turnover ratio = Sales/Receivables
Walgreens A/R Turnover ratio (2019) = (136,866)/(7,226) = 18.94
Walgreens A/R Turnover ratio (2020) = (139,537)/(7,132) = 19.56
CVS A/R Turnover ratio (2018) = (194,579)/(17,631) = 11.04
CVS A/R Turnover ratio (2019) = (256,776)/(19,617) = 13.09
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
Walgreens has a higher A/R Turnover Ratio than CVS.A/R Turnover Ratio is a metric to determine how efficient a company is at collecting customer payments. The higher the number, the better, since it means the company is collecting payments quickly. However, if the ratio is too high, that may mean the company is too strict on collecting payment, which may upset customers.
G. Inventory turnover ratio for Walgreens Inventory turnover ratio for CVS
Inventory Turnover Ratio = COGS/Inventory
Walgreens Inventory Turnover Ratio (2019) = (106,790)/(9,333) = 11.44
Walgreens Inventory Turnover Ratio (2020) = (111,520)/(9,451) = 11.8
CVS Inventory Turnover Ratio (2018) = (156,447)/(16,450) = 9.51
CVS Inventory Turnover Ratio (2019) = (158,719)/(17,516) = 9.06
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
The Inventory Turnover Ratio determines how well a company sells its inventory. The higher the ratio, the more likely a company’s sales are healthy. However, if inventory is being sold too quickly, that may mean they’re underpricing their item, which leaves money on the table. Walgreens has a slightly higher ratio than CVS. It may be the result of offering a better selection of products and services that consumers like more or it could also be that Walgreen’s supply chain is more efficient than CVS.
MARKET ANALYSIS RATIOS
H. Earnings per share for Walgreens Earnings per share for CVS
(*Basic, not Diluted*)
EPS Formula = (Net income – Preferred Dividends)/(Weighted average number of shares outstanding)
Walgreens EPS (2019) = 4.32
Walgreens EPS (2020) = .52
CVS EPS (2018) = (-596 – 2,038)/(1,044) = -2.52
CVS EPS (2019) = (6,631 – 2,603)/(1,301) = 3.1
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
Earnings per share is a metric that measures how much of the company’s profit is attributed to each outstanding share. Investors and analysts closely examine this metric because it’s an effective stat when comparing companies over a period of time. While CVS reported a higher EPS than Walgreens in the most recent year of its 10k, Walgreens has a better average over a two-year period. As a result, people that are potentially seeking to receive a share of a company’s profits are better suited to investing in Walgreens.
I. Return on Equity for Walgreens Return on Equity for CVS
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
Return on Equity is a metric that measures how well a company generates its profits from its shareholders’ money invested in the business. The higher the number, the better a company creates value from its shareholders’ investment. While CVS reported a higher ROE than Walgreens in the most recent year of its 10k, Walgreens has a better average over a two-year period. As a result, Walgreens manages its equity capital better than CVS.
J. Market Cap for Walgreens Market Cap for CVS
Market Cap Formula = Most recent share price * total number of shares outstanding
(*I’m using the closing share price on Dec. 30, 2019 – last market day of 2019)
Walgreens Market Cap (2019) = $52.33 billion
Walgreens Market Cap (2020) = $34.45 billion
CVS Market Cap (2018) = $84.84 billion
CVS Market Cap (2019) = $96.72 billion
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
Market Cap is a metric that measures the total value of a company’s share at a given time multiplied by the total shares outstanding. Market Cap helps investors and analysts determine how big a company is. So, the larger the market cap, the more established the company is. If people want to put their money towards a “blue chip stock,” or a well-established company, this is usually a good indicator. Whether it is the customer experience, products and services offered, or the number of locations, CVS has a much greater Market Cap, which symbolizes that its overall presence is bigger than Walgreens.
I. Free Cash Flow for Walgreens Free Cash Flow for CVS
FCF Formula = Operating Cash Flow – Capital Expenditure (Investing activiities)
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
FCF is available money that can be distributed to creditors and stockholders because its not needed for working capital or fixed asset investments. Across a two-year period, Walgreens has a higher FCF than CVS primarily due to CVS’s large acquisition in 2018. The vast majority of their investing activities in that year stemmed from that. Whereas Walgreens’s acquisitions and additions to PPE remained low, which means they aren’t expanding as much.
Ratios:
Walgreens 8/31/20
CVS 12/31/19
EXPLAIN
A
Net Working Capital
-$9 billion
-$3 billion
Walgreens’s NWC decreased approximately 27% from 2019 to 2020, mainly due to its overall drop in revenue and new operating lease obligation. CVS’s NWC drastically decreased by approximately 350% from 2018 to 2019, mainly due to increased accrued expenses and all A/P costs. Walgreen’s reason for its decrease in NWC differs from CVS’s reason since Walgreen’s biggest liability increase is in its loan, while CVS has many liability increases stemming from its A/P and accrued expenses. Even though Walgreens’s -$9 billion NWC is lower than CVS’s -$3 billion NWC, I think CVS is worse because they have more areas to address for its drastic increase in current liabilities. Walgreens increased current liabilities simply stem from investing/growing.
B
Current ratio
66.76%
94.37%
CVS’s higher current ratio means they have a greater ability to pay its short-term debts with its short-term assets. However, even though CVS’s ratio/percentage is closer to 100% than Walgreens, it does not necessarily mean that CVS is a “healthier” company. In the previous problem, Walgreens’s decrease in NWC was resulted from a loan. Walgreens is taking measures to grow its company. CVS’s decrease in NWC was resulted from many A/P factors, which is more complex than taking out a loan.
C
Quick ratio
31.85%
61.51%
CVS’s higher Quick Ratio means they have a greater ability to meet its short-term financial obligations without relying on the sale of inventory. Instead of focusing on inventory, quick ratio focuses on assets that can be easily converted into cash, which is a more conservative measure of liquidity. CVS is less reliant on its inventories than Walgreens, as CVS’s inventories make up a little over 1/3 (17,516/50,302 = .35 = 35%) of its assets while Walgreens inventories make up approximately 1/2 (9,451/18,073 = .52 = 52%) of its assets. Similar to Current Ratio, 100% or greater is ideal.
D
Gross Profit ($ and %)
$28 billion And 25.12%
$98.1 billion And 38.19%
Gross profit solely focuses on the profitability of its core operating activities relating to its products or services sold. In other words, this metric only accounts for the revenue and costs associated with CVS and Walgreens products and services. Over a three-year period, CVS recorded a bigger total Gross Profit while Walgreens recorded a higher percentage of Gross Profit. CVS’s wider reach of selling its products and services is the result of having a bigger total Gross Profit, while Walgreens was able to manage its COGS more effectively, which resulted in a better percentage of Gross Profit.
E
Debt ratio
75.76%
71.15%
Debt ratio is a metric to measure how much of the company’s assets are financed by debt. The higher the ratio, the more debt is used. Both CVS and Walgreens have a debt ratio hovering around 70%; however, CVS has a much higher percentage of long-term debt (64,699/158,279 = .4088 = 40.88%) compared to Walgreens (12203/66039 = .1847 = 18.47%). This statistic means that CVS is investing more in its future than Walgreens, whether it loans or lease obligations.
F
Accounts Receivable Turnover
19.56
13.09
Walgreens has a higher A/R Turnover Ratio than CVS.A/R Turnover Ratio is a metric to determine how efficient a company is at collecting customer payments. The higher the number, the better, since it means the company is collecting payments quickly. However, if the ratio is too high, that may mean the company is too strict on collecting payment, which may upset customers.
G
Inventory Turnover
11.8
9.06
The Inventory Turnover Ratio determines how well a company sells its inventory. The higher the ratio, the more likely a company’s sales are healthy. However, if inventory is being sold too quickly, that may mean they’re underpricing their item, which leaves money on the table. Walgreens has a slightly higher ratio than CVS. It may be the result of offering a better selection of products and services that consumers like more or it could also be that Walgreen’s supply chain is more efficient than CVS.
H
EPS
.52
3.1
Earnings per share is a metric that measures how much of the company’s profit is attributed to each outstanding share. Investors and analysts closely examine this metric because it’s an effective stat when comparing companies over a period of time. While CVS reported a higher EPS than Walgreens in the most recent year of its 10k, Walgreens has a better average over a two-year period. As a result, people that are potentially seeking to receive a share of a company’s profits are better suited to investing in Walgreens.
I
ROE
2%
10.3%
Return on Equity is a metric that measures how well a company generates its profits from its shareholders’ money invested in the business. The higher the number, the better a company creates value from its shareholders’ investment. While CVS reported a higher ROE than Walgreens in the most recent year of its 10k, Walgreens has a better average over a two-year period. As a result, Walgreens manages its equity capital better than CVS.
J
Market cap
$34.45 billion
$96.72 billion
Market Cap is a metric that measures the total value of a company’s share at a given time multiplied by the total shares outstanding. Market Cap helps investors and analysts determine how big a company is. So, the larger the market cap, the more established the company is. If people want to put their money towards a “blue chip stock,” or a well-established company, this is usually a good indicator. Whether it is the customer experience, products and services offered, or the number of locations, CVS has a much greater Market Cap, which symbolizes that its overall presence is bigger than Walgreens.
K
Free Cash Flow
$4.2 billion
$12.5 billion
FCF is available money that can be distributed to creditors and stockholders because its not needed for working capital or fixed asset investments. Across a two-year period, Walgreens has a higher FCF than CVS primarily due to CVS’s large acquisition in 2018. The vast majority of their investing activities in that year stemmed from that. Whereas Walgreens’s acquisitions and additions to PPE remained low, which means they aren’t expanding as much.
3. Which company would you invest, Walgreens or CVS, based on the financial statement analysis? Give me at least two sentences on how much and why.
I’d personally invest in CVS over Walgreens because CVS has a better EPS, Gross Profit %, and Return on Equity. These three metrics are all related because the more profit a company generates, the more earnings the company can distribute to its shareholders. In addition, a high ROE indicates that my investment is being managed efficiently. As a result, I’ll make more money with a company that performs well in these metrics.
This week’s reading covers the breakdown of “bill-and-hold,” profitability ratios, and leverage ratios.
“Bill-and-hold” is an accounting method that allows a company to recognize revenue from a sale before the exchange happens. In other words, it is a way of accommodating retailers who want to buy large quantities of products for sale in the future but put off paying for them until the products are actually sold. “Chainsaw Al,” who was CEO of Dunlap, would use this accounting method to sell Dunlap appliances to stores. It was effective for both parties, as retailers did not have the space to store these appliances in the winter but would be able to store them next season. However, Dunlap’s A/R was unusually high in one of its quarter earnings. Eventually, consumer products analyst Andrew Shore calculated a ratio called days sales outstanding (DSO), which prompted him and other analysts to downgrade Dunlap’s stock.
Out of all the profitability ratios, I believe the return on assets (ROA) is the most essential ratio for investors and analysts to consider when evaluating companies. Since every company relies on its assets to generate money (software, vehicles, machinery, etc.), ROA reflects the efficacy of this. Maintaining a balanced ROA is essential for these two reasons: (1) if an ROA is too low, that means the company’s assets are not generating enough revenue to fund its operations. (2) If an ROA is too high, that usually means executives are using accounting tricks to reduce its asset base.
Out of all the leverage ratios, I believe operating leverage is the most essential ratio for investors and analysts to consider when evaluating companies. This ratio is calculated as fixed costs/variable costs. For example, if Apple moves into a bigger, more efficient store, Apple is increasing its fixed costs. However, their goal is to reduce variable costs since fixed costs remain constant while variable costs fluctuate with production. By achieving this, companies can achieve cost stability, which makes it easier for them to manage their expenses.
1. Between conciliation, mediation, and arbitration, mediation is the preferred method for companies to resolve peer-to-peer and manager-to-subordinate disputes. All three methods are suitable, depending on the circumstance. For instance, conciliation is most beneficial if both parties are unfamiliar with each other and are more comfortable having a third party communicating with them. What I personally like about conciliation is that the informality of this process allows both sides to agree on the structure and timing of the proceedings, which may lead to leaving both sides satisfied at the end of the dispute. Mediation is best suited for both parties who are familiar with each other and want more involvement in creating a mutually agreeable solution. Mediation also strengthens work relations between the two sides. The main reason why I like mediation the most is because it generally unites both sides more effectively, and the mediator’s proposals don’t concretely determine anything. Arbitration is most effective if both sides cannot reach a mutually beneficial agreement and give a third party “the authority to impose a settlement on the parties” (Griffin, P. 371). While it is the most severe method of the three, it is generally faster than litigating in court, and the dispute details are not publicized.
2. The best method to resolve a peer-to-peer dispute is through mediation. In practice, a mediator is perceived as neutral, and if not, then “he or she is not likely to be effective” (Griffin, P. 371). Since mediation is generally used in situations where both parties are familiar with each other, both sides must preserve their working relationships together. The two most significant advantages are the mutually beneficial solutions and cost-efficacy that arise from this dispute structure. For instance, if two employees are complaining about the other not doing enough work in a shared assignment, the mediator can begin by coming up with common areas between the two employees. Chances are, both employees strive to make sure their work is completed well and on time. Also, it was evident that there needed to be a clear set of guidelines for who was supposed to do each task. As a result, the mediator may propose a solution that ensures their supervisor communicates to these two employees about their tasks, which properly addresses the situation at hand. Meanwhile, the company saves resources by not having to litigate in court and risk this information going public.
3. Although the dynamic between the two parties is different since it is between the boss and the subordinate, the mediation process should be executed similarly. The two biggest factors that have shifted from the peer-to-peer example are the power imbalance and fear of retaliation of the subordinate. The employee is disadvantaged since they are disputing a problem with the boss. It’s normal for the subordinate to be concerned because since the boss has a “higher status” within the company, he may use his authority to make the subordinate’s time at work miserable. On the other hand, since bosses are considered “higher up,” they also do not want to be seen as incompetent or ineffective at their job, and being challenged by a subordinate is a clear sign of this. If other subordinates find out about one of their coworkers disputing something about the boss, these coworkers may lose faith in their boss, which could result in a less engaged and motivated staff. Therefore, it is also in the boss’s best interest to come to a reasonable agreement with his employee to make sure he has the respect of everyone he manages. With this being said, it’s essential that mediators “insist on objective fairness criteria” (Griffin, P. 368). Despite the boss having more experience and knowledge, the mediator must treat both parties equally by following any industry norms or agreed-upon rules set up by the company.
Mikael La Ferla 