Assets Utilization Ratios
Asset Utilization Assets utilization (activity, turnover) ratios reflects the way in which a company uses its assets to obtain revenue and profit. One example is how well receivables are turning into cash. The higher the ratio, the more efficiently the business manages its assets.
Accounts receivable ratios comprise the accounts receivable turnover and the average collection period.
The accounts receivable turnover provides the number of times accounts receivable are collected in the year. Dividing net credit sales by average accounts receivable produces the accounts receivable turnover. One can calculate average accounts receivable by the average accounts receivable balance during a period.
|Accounts receivable turnover =
||Net credit sales
Average accounts receivable
The average collection period, also called days sales outstanding (DSO), is the length of time it takes to collect receivables. It represents the number of days receivables are held.
|Average collection period =
Accounts receivable turnover
Inventory ratios are useful, especially when a buildup in inventory exists. Inventory ties up cash. Holding large amounts of inventory can result in lost opportunities for profit as well as increased storage costs. Before extending credit or lending money, one should examine the firm's inventory turnover and average age of inventory.
|Inventory turnover =
||Costs of goods sold
|Average age of inventory =
The operating cycle is the number of days its takes to convert inventory and receivables to cash.
Operating cycle = Average collection period + Average age of inventory
By calculating the total assets turnover, one can find out whether the company is efficiently employing its total assets to obtain sales revenue. A low ratio may indicate too high an investment in assets in comparison to the sales generated.
|Total assets turnover =
Average total assets
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