Based on a number of operational challenges experienced over the last few years, Mitsubishi Technology is considering a review of its working capital policy. This will improve its cash flow cycle. Mitsubishi’s sales for last year were R3 250 000 (all on credit), and the net profit margin was at 7%. It had an inventory turnover of 6.0 times during the year and a DSO of 41 days. Its annual cost of goods sold was R1 800 000. Mitsubishi had a fixed assets of R535 000 and a payables deferral period of 45 days.
1. Calculate Mitsubishi’s cash conversion cycle.
2. Assuming Mitsubishi holds negligible amount of cash and market securities, calculate its total assets turnover and ROA.
3. Suppose Mitsubishi’s managers believe the annual inventory turnover can be raised to 9 times without affecting sales or profit margins. What would Mitsubishi’s cash conversion cycle, total assets turnover, and ROA have been if inventory turnover had been 9 times for the year?