Assets Management Ratio
Assets management ratios are another important financial ratios. They are an indicator of how well a firm is
managing its assets. They are often named as activity ratios or efficiency ratios or turnover ratios. It is crucial for
an organization to maintain schematic management of Assets because once assets are used, if it doesn’t produce
profit, will result in loss. Such assets can be lost forever. Thus assets management ratios help in managing such
assets.
Types
Inventory Turnover ratio: It is defined as the ratio of Cost of Goods Sold and Average Inventory.
It measures the efficiency of utilization of inventory.
Inventory Turnover Ratio= Costs of goods sold/ Average Inventory
Where, we get Cost Of Goods Sold by substracting Gross profit from Net sales.
i.e Cost of goods sold= Net Sales- Gross Profit
When gross profit is deducted from Net sales, it shows how much the cost (Purchasing cost and production cost )
of goods were incurred. When divided by Average inventory, it shows the ratio of inventory that was sold.
A higher inventory turnover ratio is better because it shows that inventories is being managed very efficiently. A
low inventory turnover ratio shows more investment has been made in maintaining inventories relative to sales. A
higher inventory ratio means there will be shortage of inventories most of the times and thus needs to be properly
managed.
Inventory turnover ratio can also be used to find the age of inventory. i.e in how many days inventory is being
cleared.
Mathematically,
Days of inventory (age of inventory) = Days in a year/ Inventory turnover ratio
Receivables turnover ratio: An organization doesn’t always work on direct payment. It works on
credit also. Thus receivables are created. Receivables is very important to maintain liquidity and
should be collected on time. For this purpose, Receivables turnover ratio shows the ratio of annual
sales and average debtors.
Mathematically:
Receivables turnover ratio= Annual Credit sales/ Average receivables or debtors
The higher the ratio, the more efficient a company is in the management of collection from debtors. A low ratio
shows that a company is inefficient in collection.
3. Days sales outstanding (DSO): A company works in cash payment as well as in credit. It becomes crucial to
collect debt in timely manner for smooth functioning of a company. Otherwise, a company may run short of cash
to pay for its daily needs. Thus to solve this issue, the Days Sales Outstanding is calculated. It calculates a
company’s ability to collect debt timely. The lower the days sales outstanding, the better a company is collecting
its debts. Also the higher the DSO, the performance of the company in terms of debt collection is worst.
Mathematically,
DSO= Receivables/ Average Credit Sales per day
For example, If the receivables is Rs 500 and average credit sales per day is 50, then
DSO= 500/50 = 10 days
It shows that the receivables is collected in 10 days. If the credit term is 10 days or lower, then the company is
managing receivables effectively. But if the DSO is higher than 10, it shows that the company hasn’t been able to
manage receivables properly.
4. Fixed Assets Turnover Ratio: A company should use its fixed assets to generate sales. This helps a company
to remain in business for a longer term. To find out if a company is utilizing fixed assets to generate sales
properly, fixed assets turnover ratio is calculated. It is calculated by dividing Sales by Net fixed Assets.
Mathematically,
Fixed Assets turnover ratio = Sales/ Net Fixed Assets
Higher value of this ratio shows that a company is efficient in managing its assets. Whereas lower value shows
that a company hasn’t been able to manage or make optimal use of its fixed assets. Thus it is one of the major
factor in ratio analysis.
For example, if sales is Rs 50,000 and Net fixed assets is Rs 25000, then
Fixed Assets Turnover Ratio= 50000/25000 = 2
But if sales is Rs 50,000 and Net Fixed Assets is 30,000, then
Fixed Assets Turnover Ratio= 50000/30000= 1.66
In conclusion, it shows that the company having Fixed Assets Turnover ratio of 2 is performing better than that
of the company having ratio of 1.66.
5. Working capital turnover ratio: The working capital turnover ratio calculates how the working capital of a
firm has been utilized. The working capital is calculated as Total Current Assets less Total Current Liabilities.
Thus it is the excess value of Current Assets which can be used for other purposes.
Mathematically,
Working capital turnover ratio = Annual net sales/ Average working capital
It is to be noted that, in the above formula, for higher value of working capital turnover ratio, the value of average
working capital should be lower. Thus, it shows that there is lower investment in working capital and the
profitability becomes higher. In other case, if there is more investment in working capital, the value of average
working capital will be higher and the working capital turnover ratio will be lower. Thus, it reflects
mismanagement.
6. Total Assets Turnover ratio: This ratio shows how a company is utilizing its Total Assets. To calculate this
ratio we should divide Sales by Total Assets.
Mathematically,
Total Assets Turnover Ratio= Sales/ Total Assets
Total Assets is calculated as the sum of Current Assets, Fixed Assets and Investment. Thus the above ratio shows
how much greater sales is being generated in comparison of assets being employed. The value of this ratio is
better if it is higher than one because it shows that a company is generating enough sales. A low ratio means a
company is not performing better.
Further Reads
https://usefulfinanceforus.blogspot.com/2025/07/debt-management-ratio-analysis.html
https://usefulfinanceforus.blogspot.com/2025/07/profitability-ratios.html
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