Asset management ratios

Asset management ratios: What is it?

Asset management (turnover) ratios compare the assets of a company to its sales revenue. Asset management ratios indicate how successfully a company is utilizing its assets to generate revenues. Analysis of asset management ratios tells how efficiently and effectively a company is using its assets in the generation of revenues. They indicate the ability of a company to translate its assets into the sales. Asset management ratios are also known as asset turnover ratios and asset efficiency ratios.

Asset management ratios are computed for different assets. Common examples of asset turnover ratios include fixed asset turnover, inventory turnover, accounts payable turnover ratio, accounts receivable turnover ratio, and cash conversion cycle. These ratios provide important insights into different financial areas of the company and its highlights its strengths and weaknesses.

High asset turnover ratios are desirable because they mean that the company is utilizing its assets efficiently to produce sales. The higher the asset turnover ratios, the more sales the company is generating from its assets.

Although higher asset turnover ratios are preferable, but what is considered to be high for one industry, may be low for another. Therefore it is not useful to compare asset turnover ratios of different industries. Different industries have different requirements with regard to assets. It would be unwise to compare an ecommerce store which requires little assets to a manufacturing organization which requires large manufacturing facilities, plant and equipment.

Low asset turnover ratios mean inefficient utilization of assets. Low asset turnover ratios mean that the company is not managing its assets wisely. They may also indicate that the assets are obsolete. Companies with low asset turnover ratios are likely to be operating below their full capacity.

Financial analyses have highlighted relationship between profit margins and asset turnover ratios. It has often been observed that companies with high profit margins have lower asset turnover ratios. On the other hand, companies with lower profit margins tend to have higher asset turnover ratios.

Asset turnover ratios are not always very useful. Asset turnover ratios will not give useful insights into the asset management of companies which sell highly profitable products but not often. 

Accounts Payable Turnover Ratio

Accounts payable turnover ratio is an accounting liquidity metric that evaluates how fast a company pays off its creditors (suppliers). The ratio shows how many times in a given period (typically 1 year) a company pays its average accounts payable. An accounts payable turnover ratio measures the number of times a company pays its suppliers during a specific accounting period.

Asset Turnover

Asset turnover (total asset turnover) is a financial ratio that measures the efficiency of a company's use of its assets to product sales. It is a measure of how efficiently management is using the assets at its disposal to promote sales. The ratio helps to measure the productivity of a company's assets.

Capacity Utilization Rate

Capacity utilization rate is a metric which is used to compute the rate at which probable output levels are being met or used. The output is displayed as a percentage and it can give a proper insight into the general negligence that the organization is at a point of time. Capacity utilization rate is also called as operating rate. 

Cash Conversion Cycle (Operating Cycle)

The cash conversion cycle (CCC) is the length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable. It is the time required for a business to turn purchases into cash receipts from customers. CCC represents the number of days a firm's cash remains tied up within the operations of the business.

Days Inventory Outstanding (DIO)

Days Inventory Outstanding (DIO) is an average inventory level expressed in days.

Days Payable Outstanding (DPO)

Days payable outstanding (DPO) is the accounts payableturnover expressed in days (accounts payable outstanding in days).

Days Sales Outstanding (DIO)

Days Sales Outstanding (DIO) is an average collection period in days for the accounts receivable (accounts payable outstanding in days).

Defensive Interval Ratio (DIR)

Defensive Interval Ratio is a ratio that measures the number of days a company can operate without having access to non-current assets. This ratio compares the assets to the liabilities instead of comparing assets to expenses. Defensive Interval Ratio or DIR is a good way to find out if the company is a good investment for you or not. Defensive Interval Ratio is also called as Defensive Interval Period.

Fixed Asset Turnover

Fixed asset turnover ratio compares the sales revenue a company to its fixed assets. This ratio tells us how effectively and efficiently a company is using its fixed assets to generate revenues. This ratio indicates the productivity of fixed assets in generating revenues. If a company has a high fixed asset turnover ratio, it shows that the company is efficient at managing its fixed assets. Fixed assets are important because they usually represent the largest component of total assets.

Inventory Turnover

Inventory turnover is a measure of the number of times inventory is sold or used in a given time period such as one year. It is a good indicator of inventory quality (whether the inventory is obsolete or not), efficient buying practices, and inventory management. This ratio is important because gross profit is earned each time inventory is turned over. Also called stock turnover.

Receivable Turnover Ratio

The receivable turnover ratio (debtors turnover ratio, accounts receivable turnover ratio) indicates the velocity of a company's debt collection, the number of times average receivables are turned over during a year. This ratio determines how quickly a company collects outstanding cash balances from its customers during an accounting period. It is an important indicator of a company's financial and operational performance and can be used to determine if a company is having difficulties collecting sales made on credit.

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