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Analyzing Financial Statements > Asset Management Ratios
Asset Management Ratios
• Inventory Turnover Ratio
• Days Sales Outstanding
• Fixed Assets Turnover Ratio
• Total Assets Turnover Ratio
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Analyzing Financial Statements > Asset Management Ratios
Inventory Turnover Ratio
• Inventory turnover = Cost of goods sold/Average inventory.
• Average days to sell the inventory = 365 days /Inventory turnover ratio.
• A low turnover rate may point to overstocking, obsolescence, or deficiencies in
the product line or marketing effort.
• Conversely, a high turnover rate may indicate inadequate inventory levels, which
may lead to a loss in business as the inventory is too low.
Inventory
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Analyzing Financial Statements > Asset Management Ratios
Days Sales Outstanding
• Days sales outstanding is a financial ratio that illustrates how well a company's
accounts receivables are being managed.
• DSO ratio = accounts receivable / average sales per day, or DSO ratio =
accounts receivable / (annual sales / 365 days).
• Generally speaking, higher DSO ratio can indicate a customer base with credit
problems and/or a company that is deficient in its collections activity. A low ratio
may indicate the firm's credit policy is too rigorous, which may be hampering
sales.
Days Sales Outstanding
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Analyzing Financial Statements > Asset Management Ratios
Fixed Assets Turnover Ratio
• Fixed asset turnover = Net sales / Average net fixed assets.
• The higher the ratio, the better, because a high ratio indicates the business has
less money tied up in fixed assets for each unit of currency of sales revenue. A
declining ratio may indicate that the business is over-invested in plant, equipment,
or other fixed assets.
• Fixed assets, also known as a non-current asset or as property, plant, and
equipment (PP&E), is a term used in accounting for assets and property that
cannot easily be converted into cash.
Turn Tables
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Analyzing Financial Statements > Asset Management Ratios
Total Assets Turnover Ratio
• Total assets turnover = Net sales revenue / Average total assets.
• Net sales are operating revenues earned by a company for selling its products or
rendering its services.
• Anything tangible or intangible that is capable of being owned or controlled to
produce value and that is held to have positive economic value is considered an
asset.
• Companies with low profit margins tend to have high asset turnover, while those
with high profit margins have low asset turnover.
Assets
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Appendix
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Analyzing Financial Statements
Key terms
• average collection period 365 divided by the receivables turnover ratio
• business cycle The term business cycle (or economic cycle) refers to economy-wide fluctuations in production or economic
activity over several months or years.
• days in inventory the average value of inventory divided by the average cost of goods sold per day
• holding cost In business management, holding cost is money spent to keep and maintain a stock of goods in storage.
• IAS International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that
company accounts are understandable and comparable across international boundaries.
• outstanding check a check that has been written but has not yet been deposited in the receiver's bank account
• profit margins Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated
by finding the net profit as a percentage of the revenue.
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Analyzing Financial Statements
Assets
Asset turnover measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company.
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Analyzing Financial Statements
Turn Tables
Turn tables should help you remember turnover. Fixed-asset turnover indicates how well the business is using its fixed assets to generate sales.
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Analyzing Financial Statements
Inventory
A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort.
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Flickr. "All sizes | June 8-14, 2011 | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/osseous/5903703724/sizes/m/in/photostream/ View on
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Analyzing Financial Statements
Days Sales Outstanding
A low ratio may indicate the firm's credit policy is too rigorous, which may be hampering sales.
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http://www.google.com/imgres?q=sales&hl=en&biw=1275&bih=595&tbs=sur:fmc&tbm=isch&imgrefurl=http://www.insidesales.com/insider/dialer/cut-lead-costs-in-
Analyzing Financial Statements
A business begins its fiscal year with an inventory balance of
$1,000,000. During that year its cost of goods sold is $3,500,000.
Its inventory balance at the end of the year is $500,000. What is
its inventory turnover for the year?
A) 4.67
B) 0.21
C) 78.16
D) 0.12
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Analyzing Financial Statements
A business begins its fiscal year with an inventory balance of
$1,000,000. During that year its cost of goods sold is $3,500,000.
Its inventory balance at the end of the year is $500,000. What is
its inventory turnover for the year?
A) 4.67
B) 0.21
C) 78.16
D) 0.12
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Analyzing Financial Statements
A business has $1,250,000 in accounts receivable. Its annual
sales for the fiscal year is $30,000,000. What is its days sales
outstanding ratio?
A) 0.041
B) 8760
C) 24
D) 15.208
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Analyzing Financial Statements
A business has $1,250,000 in accounts receivable. Its annual
sales for the fiscal year is $30,000,000. What is its days sales
outstanding ratio?
A) 0.041
B) 8760
C) 24
D) 15.208
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Analyzing Financial Statements
At the beginning of a fiscal year, a company has $1,000,000 in
fixed assets. During that year, it makes $8,000,000 in net sales. At
the end of the fiscal year it has $1,500,000 in fixed assets. What
is its fixed-asset turnover ratio?:
A) 6.4
B) .15625
C) 8
D) 5.333
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Analyzing Financial Statements
At the beginning of a fiscal year, a company has $1,000,000 in
fixed assets. During that year, it makes $8,000,000 in net sales. At
the end of the fiscal year it has $1,500,000 in fixed assets. What
is its fixed-asset turnover ratio?:
A) 6.4
B) .15625
C) 8
D) 5.333
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Analyzing Financial Statements
A business begins its fiscal year with $10,000,000 in total assets.
During the year it has net sales revenue of $45,000,000. At the
end of the year it has $8,000,000 in total assets. What is its total
assets turnover ratio?
A) 4.5
B) 5.62518
C) 5
D) 2.5
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Analyzing Financial Statements
A business begins its fiscal year with $10,000,000 in total assets.
During the year it has net sales revenue of $45,000,000. At the
end of the year it has $8,000,000 in total assets. What is its total
assets turnover ratio?
A) 4.5
B) 5.62518
C) 5
D) 2.5
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Analyzing Financial Statements
Attribution
• Wikipedia. "Net sales." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_sales
• Wikipedia. "Total Asset Turnover." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Total_Asset_Turnover
• Wikipedia. "Asset." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Asset
• Wikipedia. "profit margins." CC BY-SA 3.0 http://en.wikipedia.org/wiki/profit%20margins
• Wikipedia. "Days sales outstanding." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Days_sales_outstanding
• Wikipedia. "Average collection period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Average_collection_period
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//accounting/definition/outstanding-check
• Wikipedia. "Days in inventory." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Days_in_inventory
• Wiktionary. "business cycle." CC BY-SA 3.0 http://en.wiktionary.org/wiki/business+cycle
• Wikipedia. "Fixed-asset turnover." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Fixed-asset_turnover
• Wikipedia. "Fixed asset." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Fixed_asset
• Wikipedia. "IAS." CC BY-SA 3.0 http://en.wikipedia.org/wiki/IAS
• Wikipedia. "holding cost." CC BY-SA 3.0 http://en.wikipedia.org/wiki/holding%2520cost
• Wikipedia. "Inventory turnover." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Inventory_turnover
• Wikipedia. "Inventory turnover." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Inventory_turnover
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