Characteristics Of Asset Management Ratio
Asset management ratios can be classified as accounts payable turnover, inventory turnover, days sales outstanding, fixed asset turnover, days inventory outstanding, cash conversion cycle, and receivable turnover.
- Various financial ratios highlight the company’s strengths and shortcomings in specific areas of its finances.
- High asset management ratios are required to indicate that the organisation forecasts sales using its assets effectively.
- A low asset turnover ratio, on the other hand, might be caused by assets that are obsolete or are running at less than their full potential.
- Although it cannot be utilised to compare data or do asset management ratio analysis since regulations differ by industry. This brings to an end the unwise comparison of a firm that requires fewer assets to manufacture, such as e-commerce, to a corporation with vast buildings, equipment, and plants.
Types Of The Asset Management Ratios
Total assets turnover, working capital turnover, inventory turnover, receivables turnover, payable turnover, and day’s sales in inventory are some of the most frequent asset management ratios. Let’s go through each of these in more depth.
1-Relative Asset Turnover Ratio
The following formula is used to compute this ratio.
Asset turnover ratio = Sales / Total assets
2-Working Capital Turnover Ratio
The following formula is used to compute the ratio.
Working capital turnover ratio = Net annual sales of the business / Average working capital implied
3-Fixed Assets Turnover Ratio
The following formula is used to compute this ratio.
Fixed assets turnover = sales / Total fixed assets
4-Inventory Turnover Ratio
The following formula is used to compute the ratio.
Inventory turnover ratio = Cost of goods sold / Average inventory
5-Receivable Turnover
The ratio is calculated with the following formula.
Accounts receivables turnover ratio = Net credit sales / Average accounts receivables
6-Days Sales Outstanding – DSO
The ratio is calculated with the following formula.
Days sales outstanding = Average accounts receivables / Sales x 365
7-Payable Turnover Ratio
This ratio is calculated with the following formula.
Accounts payable turnover = Total supplies purchases / Average accounts payable
Interpretation Of Asset Management Ratio
Most asset management ratio equations use sales as the numerator and assets of different types, such as total, fixed, and so on, as the denominator. As a result, the assets alter. As a result, below are a few interpretations of the asset management ratio:
Asset Management Ratio Greater Than One
When conducting asset management ratio analysis, a greater ratio is always conducted. This shows the most efficient use of firm assets in order to integrate the cash.
The ratio greater than one implies that the proportion of sales generated exceeds the entire number of assets in use, indicating that the firm is productive. The higher the ratio, the better the asset management company position in comparison to competitors in the same industry.
Asset Management Ratio Lesser Than One
Asset management ratios less than one imply that either the assets are not being used properly to generate sales or that the assets have been deployed excessively for the organisation. The ratio explains why the proportion of assets in the firm is greater than the proportion of revenue.
As previously established, the lower the ratio, the worse the company’s efficiency will be in comparison to competitors in the same industry. However, this may occur as a result of corporate development or expenditures that must be put to use.
Asset Management Ratio = 1
Although it appears to be excellent, the corporation does not appreciate or desire this state. A ratio of one indicates that the proportion of assets is the same as the proportion of revenues in the firm. Furthermore, when compared within the same industry, these ratios are accurate.
Advantages Of Asset Management Ratios
- The asset management ratio assists stakeholders and the organisation in making decisions. Asset management ratio analysis aids in determining the size of asset investments.
- Explains the company’s operational efficacy and efficiency. Because relying on earnings may be deceptive.
- Can be used to contrast two or more companies in the same industry. As a result, the inter-firm comparison is useful. It is possible that one business will produce a bigger profit, but the former will have the weakest asset management ratios.
- There is no one approach that may be utilised to expound on the company’s predicament. Various asset management ratios, as described, might be useful depending on the asset type.
- As a result, the benefits are non-exhaustive in character.
Disadvantages Of Asset Management Ratios
- The most significant shortcoming of asset management ratios might be focusing just on sales revenue while ignoring the company’s profits. In a few circumstances, the company may have great sales yet struggle with gross or net earnings. As a result, relying on it provides a deceptive indication.
- The examination of asset management ratios is based on historical data or financial records. As a result, the possibility of manipulation exists.
- Furthermore, asset management ratios do not address whether a company can be capital or labour heavy. If the business is labour-intensive, the assets will be lower than if it is capital-intensive. As a result, such a comparison could only be made within the same industry. However, comparing industries may result in an incorrect interpretation.
How Do Improve Asset Management Ratios?
Because the asset management ratio focuses primarily on the company’s assets in terms of sales, the rationale for the asset turnover ratio might be extended. As a result, when the business ratio drops over time, there are numerous approaches that might be taken to address the subject of how to enhance asset management ratios.
Increase Revenue
The easiest method is to concentrate on increasing income in order to improve asset management ratios. Even if assets are well utilised, poor sales will result in a lower ratio. As a consequence, faster flow of finished items and more marketing might boost sales.
Liquidate Assets
Unused or outdated assets must be sold as quickly as feasible. However, assets that are only utilised on occasion must be evaluated to see whether they may be kept. As a result, those who do not contribute to the job on a regular basis are sold at the end of the business.
Leasing
Another option for organisations with fewer assets, such as e-commerce customer relationship management businesses, is to lease the assets rather than acquire them. As a result, any leased asset is not included or included in the company’s fixed assets.
Increase Efficiency
As previously stated, poor asset use can result in low asset management ratios. As a result, analysing how assets are used or improving the asset management ratio through productivity may be beneficial. This explains why a rise in output must occur without an increase in the company’s costs.
Accelerate Receivables
Slower collection of accounts receivable causes revenues to fall, resulting in a drop in asset management ratios. As a result, the organisation must practise swift collection. This might be expanded by outsourcing the activity to a collection agency, lowering the paid time offered to consumers, and hiring someone to collect pending invoices for the firm.
Improved Inventory Management
Inventory management must be considered to ensure the smooth circulation of items throughout the process. The cycle describes when the delivery system is short of or behind schedule.
Delays in product delivery to clients cause the collection time to be extended for no reason. Businesses must thus invest in technology to automate the billing, order, and system operations. The conclusion of the sales increase enhances asset management turnover ratios.
Conclusion
As a result, asset management ratios explain the stakeholders’ need to understand the company’s performance in a variety of ways. Relying just on profit structure, which is aided by ratios, is insufficient.
As a result, they are required to assess the efficacy and efficiency of the firm. The user determines the purpose. However, they do provide significance with certain restrictions. To invest.
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