Question

Picasso Company is a wholesale distributor of packaging equipment and supplies. The company’s sales have averaged about \(900,000 annually for the 3-year period 2015–2017. The firm’s total assets at the end of 2017 amounted to \)850,000.

The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past 3 years. This report will be presented to the board of directors at their next meeting.

In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015–2017.

	2015	2016	2017
Current ratio	1.80	1.89	1.96
Acid-test (quick) ratio	1.04	0.99	0.87
Accounts receivable turnover	8.75	7.71	6.42
Inventory turnover	4.91	4.32	3.42
Debt to assets ratio	51.0%	46.0%	41.0%
Long-term debt to assets ratio	31.0%	27.0%	24.0%
Sales to fixed assets (fixed asset turnover)	1.58	1.69	1.79
Sales as a percent of 2015 sales	1.00	1.03	1.07
Gross margin percentage	36.0%	35.1%	34.6%
Net income to sales	6.9%	7.0%	7.2%
Return on assets	7.7%	7.7%	7.8%
Return on common stockholders’ equity	13.6%	13.1%	12.7%

In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.

Instructions

c) Using the ratios provided, what conclusion(s) can be drawn regarding the company’s net investment in plant and equipment?

Short answer

The net investment in plant and equipment made by the firm declined throughout the three-year period 2015–2017.

Step-by-step solution

Meaning of Net investment

The total amount of money spent by a firm to purchase capital assets, less the depreciation of those assets, is referred to as a net investment. The net investment figure depicts the amount of money spent on tangible assets such as property, plant, equipment (PP&E), and other capital assets.

Conclusion regarding the company’s net investment in plant and equipment

The company’s net investment in plant and equipment has diminished during the three-year period 2015–2017. This conclusion is come to by utilizing the sales-to-fixed-assets (fixed asset turnover) and sales-as-a percent-of-2015-sales proportions.

Since sales have grown each year, the sales-to-fixed-assets can be anticipated to extend unless fixed assets develop at a faster rate. The sales-to-fixed-assets ratio expanded at a faster rate than the 3 percent yearly growth in deals; hence, net investment in plant and equipment must have declined.