Asset management (turnover) ratios

• — Accounts Payable Turnover Ratio
• — Asset Turnover
• — Capacity Utilization Rate
• — Cash Conversion Cycle (Operating Cycle)
• — Days Inventory Outstanding (DIO)
• — Days Payable Outstanding (DPO)
• — Days Sales Outstanding (DIO)
• — Defensive Interval Ratio (DIR)
• — Fixed Asset Turnover
• — Inventory Turnover
• — Receivable Turnover Ratio

Asset management (turnover) ratios: What is it?

Asset management (turnover) ratios compare a company's assets to its turnover. Asset management ratios indicate how successfully a company uses its assets to generate revenue. Analysis of asset management ratios reveals how efficiently and effectively a company uses its assets to generate revenue. They indicate a company's ability to convert its assets into sales. Asset management ratios are also known as asset turnover ratios and asset efficiency ratios.

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

High asset turnover ratios are desirable because they indicate that the company is using its assets efficiently to produce sales. The higher the asset turnover ratio, the more revenue 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 indicate inefficient use of assets. Low asset turnover ratios mean that the company is not managing its assets wisely. It may also indicate that the assets are obsolete. Companies with low asset turnover ratios are likely to be operating below full capacity.

Financial analysis has shown a 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 useful. Asset turnover ratios will not provide useful insights into the asset management of companies that sell highly profitable, but infrequent, products.

What Metrics are Used to Manage Assets (turnover)?

There are several different types of asset management ratios, but some common examples include:

1. Accounts receivable turnover ratio. This ratio measures how many times a company collects its average accounts receivable balance over a given period. A higher ratio indicates that the company is collecting its receivables more quickly, which is generally seen as a positive sign.
   
   Data sources for calculation: The average accounts receivable balance from the balance sheet and sales revenue from the income statement.
   

2. Inventory turnover ratio. This ratio measures how many times a company sells and replaces its inventory over a given period. A higher ratio indicates that the company is selling its inventory more quickly, which can be a positive sign, but a very high ratio could also indicate that the company is carrying too little inventory to meet customer demand.
   
   Data sources for calculation: The cost of goods sold from the income statement and the average inventory balance from the balance sheet.
   

3. Fixed asset turnover ratio. This ratio measures how effectively a company is using its fixed assets (such as property, plant, and equipment) to generate revenue. A higher ratio indicates that the company is generating more revenue per dollar of fixed assets, which can be a positive sign.
   
   Data sources for calculation: Sales revenue from the income statement and the net value of fixed assets (i.e., the cost of the assets less accumulated depreciation) from the balance sheet.
   

4. Total asset turnover ratio. This ratio measures how effectively a company is using all of its assets (including both current and fixed assets) to generate revenue. A higher ratio indicates that the company is generating more revenue per dollar of assets, which can be a positive sign.
   
   Data sources: Sales revenue from the income statement and the total assets (i.e., current assets plus fixed assets) from the balance sheet.
   

To get a more complete picture of the company's financial health, it's important to take into account asset management ratios alongside other financial metrics and qualitative factors. In general, these ratios can offer insightful information about a company's effectiveness and efficiency in using its assets to generate revenue.

What is the Best Timeframe for Calculating Turnover Ratios?

The best timeframe for calculating turnover ratios also depends on the specific context and purpose of the analysis. However, the most common approach is to use a one-year timeframe, which is the length of time covered by most companies' annual financial statements.

Using a one-year timeframe allows for a meaningful comparison of a company's asset management performance over time and provides a good snapshot of the company's efficiency in generating revenue from its assets. It also aligns with many industry benchmarks and standards, making it easier to compare a company's performance to that of its peers.

Having stated that, there could be circumstances in which a different timeline is preferable. For instance, it may be more beneficial to compute turnover ratios on a quarterly or even monthly basis to reflect the impact of such swings if a firm suffers large seasonal fluctuations in its industry.

The timeframe that offers the most pertinent and significant information for the particular analysis or decision-making process at hand is the one that should be used to calculate turnover ratios.