You're the CFO of Widgets Inc. The CEO comes to you concerned, because while sales seem to be very strong, there does not seem to be profits to pay dividends demanded by the shareholders. He wants to know if you could let him know how well the company is using its assets, and how the net profit compares to net sales.
You remember from preparing the Financial Statements the following facts:
Total Sales of 10,000,000, and the Cost of Goods sold is 45%.
Selling and Administrative costs tend to run about 35% of Total Sales, and other fixed costs are $1,000,000. Widgets has $4,000,000 in cash, Plant and equipment valued at $10,000,000 and Inventory worth $6,000,000.
Using this information, what ratios should you calculate, and what advice would you give him?
Net profit (before taxes) = $10,000,000 * (1 - 0.45 - 0.35) - $1,000,000 = $2,000,000 - ...
This solution calculates ratios to determine the ability to pay dividends.