Additional question 15 solution
| Sage Asset Usage | 2001 | 2000 |
|---|---|---|
| Total Asset Turnover | 0.47 | 0.56 |
| Stock Turnover | 16.61 | 21.10 |
| Debtors' Turnover | 71.81 | 75.60 |
| Creditors' Turnover | 996.33 | 933.80 |
We know that it is difficult to comment on only two year's worth of ratio results and the case of Sage, the accounting software developer and supplier, is no exception!
Total asset turnover seems poor at much less than 1: 1, stock turnover is fine at around 17 days in 2002. Sage's credit control seems to be badly managed, though.
Debtors' turnover is very high at 72 days in 2002 and it was 76 days the year before that. This means that Sage sells on credit and then waits for eight weeks to be paid. Is this good? Should Sage be doing something about this situation? Look at what we said in the answer to question 12 - businesses will set their own ratio targets and it is probable that Sage is happy with eight weeks and this is probably the industry norm for this kind of business. If this is not true then Sage needs a new credit controller!
As far as creditors are concerned, we have a strange situation on the face of it with payment terms of around three years! Unlikely don't you think? Let's look at their creditors' due within one year information in more detail ... from the notes to the accounts, we have:
| Creditors: amounts falling due within one year | 2001 | 2000 |
|---|---|---|
| Group | £'000 | £'000 |
| Current portion of loans (note 15(a)) | 7,584 | 8,131 |
| Bank overdraft (note 24(b)) | 10 | 402 |
| Current portion of finance lease obligations (note 15(b)) | 57 | 199 |
| Trade creditors | 43,801 | 37,651 |
| Amounts owed to Group undertakings | 0 | 0 |
| Corporation tax | 31,255 | 17,537 |
| Other creditors, taxes and social security costs | 12,188 | 11,238 |
| Accruals | 20,962 | 15,271 |
| Deferred consideration on acquisitions and cost of share options assumed | 19,039 | 16,499 |
| Proposed dividend | 3,583 | 3,250 |
| 138,479 | 110,178 |
So, only around a third of the creditors' falling due within one year relate to trade creditors - let's rework the ratio and see the true value:
| 2001 | 2000 | |
|---|---|---|
| Adjusted Creditors' turnover ratio | 315.14 | 319.11 |
The ratio is still exceptionally high, at almost a year, so we still have a problem as this result is unlikely to be true. However, there is no more information in the annual report that can help us, so we can simply conclude that we need more information but we're not going to get it!
Back to Additional question 15.
Back to Creditors' Turnover Ratio
Additional notes are available on advanced stock, creditors and debtors or you can move on to the Gearing section.
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