Purpose
Convert a dealership's balance sheet and income statement into the four ratio families that drive floorplan and dealer-finance credit decisions — liquidity, leverage, asset conversion cycle, and cash flow coverage — each with a calculated value, dealer-industry benchmark, and a one-line interpretation. Eliminates manual spreadsheet recalculation and produces a consistent, review-ready snapshot for credit memos and annual reviews.
When to Use
Invoke this skill when the user asks to:
- Run a ratio analysis on a dealership's financial statements
- Assess a dealer's liquidity, leverage, or cash flow coverage for a credit decision
- Prepare ratio exhibits for a credit memo, annual review, or risk-rating refresh
- Check whether a dealership is tripping or approaching a financial covenant
- Compare a dealer's working capital cycle against floorplan financing terms
- Spot-check a dealership's financial health before extending or renewing a line
Inputs Required
Before starting, collect:
- Balance sheet: Current assets, inventory (vehicle and parts), accounts receivable, total assets, current liabilities, floorplan payable, total liabilities, net worth/equity
- Income statement: Total revenue, cost of goods sold, gross profit, operating expenses, EBIT, interest/floorplan expense, net income
- Dealer type: Franchise (new), independent (used), or both — sets benchmark expectations
- Annual or interim: Whether figures are full-year or a partial period (affects turnover annualization)
- Floorplan terms: Curtailment schedule and average days financed per unit, if available
- Adjustments: Any known add-backs (owner compensation, rent, one-time items) or LIFO/FIFO inventory basis
- Covenants: Any contractual ratio thresholds the dealer must maintain, if applicable
If dealer type is unspecified, default to franchise benchmarks and note the assumption. If interim figures are provided without a period length, annualize turnover ratios and flag the estimate.
Instructions
Step 1: Validate and Normalize Inputs
Before calculating, confirm the statements tie and adjust as needed:
- Verify total assets = total liabilities + net worth; if it doesn't balance, flag the discrepancy and proceed with the figures as given
- Note inventory basis (LIFO vs. FIFO) — LIFO reserves understate inventory and can distort current ratio and turnover
- Apply any provided add-backs to derive adjusted EBIT and adjusted net worth
- Annualize income statement figures if the period is interim (e.g., multiply a 6-month figure by 2 for turnover denominators)
Step 2: Liquidity Ratios
Calculate and interpret each:
- Current Ratio = Current Assets ÷ Current Liabilities. Dealer benchmark: 1.2–1.5x. Below 1.0x signals working capital strain.
- Quick Ratio = (Current Assets − Inventory) ÷ Current Liabilities. Dealer benchmark: 0.3–0.6x (low by design — inventory dominates dealer balance sheets). A very low quick ratio is normal; an unusually high one may signal slow inventory or excess receivables.
- Working Capital = Current Assets − Current Liabilities (dollar figure). Compare to floorplan exposure — negative working capital with high floorplan dependence is a warning.
Note: dealer current ratios are structurally lower than general commercial benchmarks because floorplan payable sits in current liabilities. Interpret accordingly.
Step 3: Leverage Ratios
Calculate and interpret each:
- Debt-to-Equity = Total Liabilities ÷ Net Worth. Dealer benchmark: under 3.5–4.0x (higher than typical commercial due to floorplan). Above 5.0x warrants scrutiny.
- Floorplan-to-Equity = Floorplan Payable ÷ Net Worth. Measures wholesale leverage specifically. Above 5.0x indicates thin equity cushion against inventory risk.
- Net Worth as % of Total Assets = Net Worth ÷ Total Assets. Benchmark: 12–20% for franchise dealers. Below 10% signals undercapitalization.
Step 4: Asset Conversion Cycle
Calculate days for each component, then the cycle:
- Days Inventory Outstanding (DIO) = (Inventory ÷ COGS) × 365. Franchise new-vehicle benchmark: 45–60 days; used: 30–45 days. Rising DIO is the earliest aging signal.
- Days Sales Outstanding (DSO) = (Accounts Receivable ÷ Revenue) × 365. Dealer benchmark: 5–15 days (mostly contracts-in-transit and warranty receivables).
- Days Payable Outstanding (DPO) = (Floorplan Payable ÷ COGS) × 365.
- Cash Conversion Cycle = DIO + DSO − DPO. The shorter, the better; compare DIO against the floorplan curtailment schedule — if DIO exceeds the days financed before curtailment, the dealer is funding aged units from its own cash.
Step 5: Cash Flow Coverage
Calculate and interpret each:
- Interest/Floorplan Coverage = Adjusted EBIT ÷ Total Interest Expense (including floorplan interest). Benchmark: above 1.5x; below 1.25x is a coverage concern.
- Fixed Charge Coverage = (Adjusted EBIT + Rent) ÷ (Interest + Rent + Current Portion of Long-Term Debt). Benchmark: above 1.2x.
- Return on Net Worth = Net Income ÷ Net Worth. Context metric for repayment capacity — declining ROE alongside rising leverage is a deteriorating-trend flag.
Step 6: Flag Summary and Covenant Check
- Assign each ratio a status: Green (within or better than benchmark), Yellow (within 15% of the warning threshold), or Red (breaches the warning threshold).
- If covenant thresholds were provided, compare each relevant ratio against its covenant and explicitly state Pass / Watch / Breach.
- Identify the single most material risk indicator and the single strongest credit positive.
Output Format
- Structure: One ratio table per family (Liquidity, Leverage, Asset Conversion Cycle, Cash Flow Coverage), each row showing Ratio | Calculated Value | Benchmark | Status (Green/Yellow/Red) | One-line interpretation; followed by a flag summary
- Length: 600–900 words including tables
- Format: Four labeled ratio tables + a closing flag summary in short prose
- Sections: Input validation notes → Liquidity → Leverage → Asset Conversion Cycle → Cash Flow Coverage → Flag Summary & Covenant Check
- Tone: Credit analyst — precise, benchmark-anchored, no hedging on the flag calls
Quality Checklist
Before delivering output, verify:
- [ ] Every ratio shows the formula inputs used, so the calculation is auditable
- [ ] Each ratio has a calculated value, a dealer-specific benchmark, and a Green/Yellow/Red status
- [ ] DIO is explicitly compared against the floorplan curtailment/days-financed schedule when provided
- [ ] Balance sheet balance check is performed and any discrepancy is flagged
- [ ] Interim figures, if present, are annualized for turnover ratios and the estimate is noted
- [ ] Flag summary names one most-material risk and one strongest positive — not a generic recap
Notes
- Dealer balance sheets are floorplan-dominated, so general commercial benchmarks (e.g., 2.0x current ratio) do not apply — always use dealer-calibrated bands
- The asset conversion cycle is the most predictive early-warning section for floorplan credit; aging inventory shows up here before it shows up in coverage ratios
- Always reconcile DIO against the curtailment schedule — a dealer can look profitable while quietly funding aged units, which is the classic out-of-trust precursor
- If only a balance sheet or only an income statement is provided, calculate the ratios that are computable and clearly mark the omitted families as requiring the missing statement
How to use this skill
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- Drag this file into a new chat, or copy and paste its contents
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