Because companies that sell prepacked consumer goods has traditionally been low margin, large volume of business, the most important financial ratios used to evaluate companies in the packaged consumer goods are the activity coefficients. In addition, to ensure the company is successful in the long term, solvency ratios must also be used to assess consumer packaged goods.
Manufacturers of consumer packaged goods is highly competitive due to high saturation and low consumer switching costs. Examples of consumer goods clothing, food and beverages, tobacco and household chemicals.
Since there is high competition, consumer goods companies often compete on price, driving their margins down and forcing them to sell large amount of products. For companies with low profitability and high sales, inventories and short-term activities become extremely important. Activity coefficients should be the first types of ratios when viewed in the production of consumer goods, including inventory turnover, days of sales inventory, receivables turnover and the period of repayment.
These activity coefficients are very important for consumer packaged goods companies, because they must move products quickly and they want a high level of inventory turnover and a low number of days sales in inventory. A high level of inventory turnover and a low volume of sales that the company sells many products and has no extra on-hand inventory.
As a company that operates in this space has a low margin, it may face problems with cash flow, creating the need for a high accounts receivable turnover and low average collection period. This ensures that the company is collecting money quickly debt and has positive cash flow.
Solvency ratios such as debt to equity and debt to asset ratios quick check to see if day-to-day operations of the company are measured using the activity coefficients lead to long-term sustainability.