How effectively a company is managing its assets?
The below Asset management ratios measure how effectively a firm is managing its assets and whether the level of those assets is properly related to the level of operations
The calculation of Inventory turnover ratio is covered in liquidity ratio, the use of this ratio is to measure the speed that inventory is used relative to sales. The higher the ratio, the better indicator for demanding products, converting to sales, reduces the risk of obsolescence.
Average collection period, also called the “Days sales outstanding”, is used to appraise accounts receivable. The Average collection period represents the average length of time that the firm must wait for receiving cash after sales made. The Average Collection Period can also be evaluated by comparison with the terms on which the firm sells its goods. If the trend in average collection period over the past few years has been rising, but the credit policy has not been changed, this would be strong evidence that steps should be taken to expedite the collection of accounts receivable.
The fixed assets or total assets turnover ratio is the ratio of sales to net fixed assets. It measures how effectively the firm uses its plant and equipment or it measures the utilization or productivity of all assets with respect to generating sales. The higher ratio the better indicator is. This ratio is more useful for companies that are common in strategies and in size which has characteristics of capital intensive. But Companies that are labor intensive the revenue per employee ratio is useful to measures the dollar of sales generated per employee. Means, measures the productivity of Company’s employees rather than company’s assets. The higher ratio, the better indicator is.