Assets Management Ratio
Assets management ratio is the tool to measure company effectiveness and efficiency in using assets to generate revenue and expand the business. It compares the sale amount with the total balance of the company assets. It will indicate how good management use the assets to make sale for the company. Besides that, It will show the company potential growth when there are many assets invest with less income. It also a sign for management to seek new capital when the company has limited assets which will hurt the sale in the future.
Assets management ratios are calculated for various kinds of assets, but we usually focus on inventory, accounts receivable, fixed assets, and total asset. These ratios will provide different indicators regarding the use of assets and they tell different stories to investors. However, the higher is always the better as it means company use assets effectively will improve company growth.
Assets management ratios are divided into many small ratios such as:
- Inventory turnover
- Days sale in inventory
- Total assets turnover
- Receivable turnover
- Das sale in receivable
- Day Sale Outstanding
- Fixed Assets Turnover
1. Inventory Turnover
Inventory turnover is the number of time which inventory is sold within a year. It is an indicator to show how good management covert inventory to revenue. The faster is the better as the company will be able to generate more revenue and the quality of products also fresh. However, different products will have different inventory turnover, so it is better to benchmark within the same industry to access company performance.
2. Days Sale in Inventory
Days sale in inventory is the number of days which company spends to sell off all inventory. In other words, it is how long the stock will last.
The shorter the company takes to sell off the stock, it will be better as they can make more revenue. But we must check the ordering process to prevent the “out of stock” as it will impact customers’ experience in long term.
3. Total Asset Turnover
Total assets turnover is the comparison of company annual sales with total assets. It will show how well the company uses all assets to generate sales within the year.
4. Receivable Turnover
Accounts Receivable Turnover is the tool to measure how well the company collects money from credit sales. It shows how many time company can convert accounts receivable into cash. It compares the amount of sales and the outstanding accounts receivable. Cash is very important for the business to pay for the employees, creditors, and other stakeholders. Without enough cash, the company will face the risk of liquidation. Even if the company is making a good profit, it will be a risk if they lack a cash balance.
In general, the higher is the better, as we need to have cash as soon as possible for paying salary, supplier, and other parties.
5. Working Capital Turnover
Working capital turnover is the ratio which shows how the company uses working capital to make a sale. The higher the better, as it shows the effectiveness of management strategy.
6. Fixed Assets Turnover
Fixed Assets Turnover is the ratio that measures the company’s ability to generate sales from the number of fixed assets invested in the company. The higher ratio shows that company is able to generate high sales compare to the invested fixed assets. It compares the amount of sales over the fixed assets.
\[Fixed\ Assets\ Turnover = {Sales \over Fixed\ Assets}\]
7. Day Sale Outstanding
Day sale outstanding is the ratio that measures the average days that company receives cash from the sale. As we know, company is trying to collect the cash from the customers and use it to pay for other parties. If the company spend a too long time collecting cash, the company may not have enough cash to pay for supplier and employee.
\[Days\ Sales\ in \ Inventory = {365 \over Inventory\ Turnover}\]
Purpose of Assets Management Ratio
The assets management ratio is a key metric that investors use to calculate and analyze a company’s financial health. This ratio measures the amount of assets that a company has relative to its liabilities, and it provides insights into a company’s ability to meet its financial obligations. A high assets management ratio indicates that a company has a strong financial position, while a low ratio indicates that a company may have difficulty meeting its obligations. The assets management ratio is an important tool for investors because it can help them assess a company’s financial risk and make more informed investment decisions.
A company’s financial statements can provide valuable insights into its overall health and performance. This information can be used by creditors to assess the company’s ability to generate sales and meet its financial obligations. Financial statements can also be used by shareholders to evaluate management’s stewardship of company resources. In addition, financial statements can be helpful in identifying trends and concerns that may impact the company’s future success. By understanding a company’s financial statements, creditors and shareholders can gain important insights into its overall health and prospects for the future.
Advantage of Assets Management Ratio
- Help the investors to select the best company to invest in: It is essential for investors to do their due diligence before investing in any company. They should look at the financial stability of the company, as well as its history and prospects. The assets management ratio is a set of ratios that investors can use to analyze the company’s performance. They should also consider the management team and board of directors, to ensure that they are experienced and reputable. Furthermore, the company’s business model should be examined to determine whether it is sustainable.
- Allow the comparison between companies: Financial ratios are a helpful tool that can be used to compare different companies. Ratios can be used to measure a variety of factors, including profitability, solvency, and efficiency. By comparing the ratios of different companies, it is possible to get a better understanding of each company’s financial health. Additionally, ratios can be used to identify trends over time, which can be helpful in making investment decisions.
Disadvantage of Assets Management Ratio
- Only focus on sales not profit: Most asset management ratios focus on the efficiency of the company’s ability to generate sales and collect cash. These ratios ignore the company’s profitability which is the ultimate goal of the company. The business may be able to generate huge sales, but it does not mean that they are making a good profit. The company may not able to reduce the cost to an acceptable level to maintain a good profit.
- Based on history data: The investors are able to calculate and analyze the assets management ratio to analyze the best performing company. However, this figure arrive from the past data which already happens last year. It is hard to predict the future base on past data. It will a chance that future performance is different from the past.
- Different capital structures: The ratio such as fixed assets turnover, working capital turnover, and inventory turnover will be different from one company to another. It depends on their capital structure and capital invested. It is hard for investors to compare one company to another.
- Not flexible: The ratios seem not flexible enough for all situations. For example, the fixed assets turnover will rely on the total fixed assets amount even if some of them are not in use. The calculation will rely on the information from the financial statements.
Conclusion
Asset management ratios are useful tools for the evaluation of the efficiency and effectiveness of business operations. These ratios are used to evaluate the company’s ability to use its assets in generating revenues. The ratios may have some limitations, however, they have many significant benefits for the company, investors, and other parties. Asset management ratios are still an essential tool for analyzing a company’s financial performance.
