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 divide into many small ratio such as:

  • Inventory turnover
  • Days sale in inventory
  • Total assets turnover
  • Receivable turnover
  • Das sale in receivable

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.

\[Inventory\ Turnover\ Ratio = {COGS \over Average\ Inventory}\]

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 be last.

\[Days\ Sale\ in\ Inventory = {Ending\ Inventory \over COGS * 365}\]

The shorter the company take 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 sale with a total asset. It will show how good the company uses all assets to generate sales within the year.

\[Total\ Assets\ Turnover = {Total\ Sale \over Average\ Assets}\]

4. Receivable Turnover

Accounts Receivable Turnover is the tool to measure how well the company collects money from credit sale. It show how many time company can convert accounts receivable into cash.

\[Accounts\ Receivable\ Turnover = {Net\ Credit\ Sale \over Average\ Accounts\ Receivable}\]

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 show how the company use working capital to make a sale. The higher is the better, as it shows the effectiveness of management strategy.

\[Working\ Capital = {Net\ Annual\ Sale \over Average\ Working\ Capital}\]