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ASSET MANAGEMENT RATIOS

What are Asset Management Ratios?

In Accounting, you learned what assets are. Companies acquire assets in order to create profits. Businesses buy all sorts of equipment and supplies in order to help them generate a profit. Asset Management Ratios are used to analyze how well companies use their assets in order to generate money for the business.

There are two types of Assets Management Ratios that you will learn:

1. Accounts Receivable Ratio. This ratio represents how fast a company collects money from their Sales. In Accounting Management 1, you learned that most Sales are paid on account initially. This ratio will tell a company if they are able quickly turn these Receivables into money for the company.

2. Inventory Turnover Ratio. This ratio indicates how fast a company sells its inventory.

Why do I need to learn about Asset Management Ratios?

It is important to learn Asset Management Ratios because learning them is a good indicator that a business can actually make money. It can tell you whether a business is efficient in its use of assets in order to earn money. It can also tell a business whether they should evaluate their people, processes, tools, and methods in order to make their businesses more efficient in the use of their assets.

What does an Asset Management Ratio look like?

Accounts Receivable Turnover

Accounts Receivable (AR) is included in current assets because it is expected to turn into cash quickly. This ratio shows how long it takes a company to collect cash owed by customers. The value of AR turnover is the number of times AR is collected per year. These values are taken from the balance sheet and income statement.

Inventory Turnover

This ratio shows how many times a year a company sells and replaces inventory. These values can be taken from the balance sheet and income statement.

Based on the table, Jollibee replaces inventory 18 times a year, or every 20 days. San Miguel replaces inventory 8 times a year, or every 46 days. Century Foods replaces inventory 4 times a year, or every 86 days.

To find out which company has the best accounts receivable turnover, compare the three companies against the industry average. Based on the industry average, you can rank the three companies as follows:

1. Jollibee (high) 

2. Century Foods (below low)

3.San Miguel Foods (below low)

To find out which company has the best inventory turnover, compare the three companies against the industry average. Based on the industry average, you can rank the three companies as follows:

1. Jollibee (above high)

2.San Miguel Foods (average)

3. Century Foods (below low)

This means, among the three companies, Jollibee is the best choice for investment based on asset management ratios. The ratios are a strong indicator that Jollibee can turn inventory into sales and collect money owed by their customers frequently.

How do I calculate Asset Management Ratios?

Accounts Receivable Ratio

1. Locate the total Accounts Receivable in the Balance Sheet of the company you are analyzing.

2. Locate the total Net Sales in the Income Statement of the company you are analyzing.

3. Refer to the formula for accounts receivable ratio in the previous section. Compute for accounts receivable turnover ratio by dividing net sales by accounts receivable. You may use a calculator or a Google Sheet. Make sure you only have two numbers after the decimal point.

4. Compare your results with an industry average.

5.Based on the ratio, you will be able to analyze the results as below:

a. A High Ratio could indicate the following:

The company's collection department is aggressive in collecting receivables from customers.

The company has strict policies on issuing credit to customers.

b .A Low Ratio could indicate the following: There are still a lot of receivables that have not yet been collected from customers. The company may have a very relaxed credit policy or the company may not have one at all. The company's customers may also be having financial difficulties.

6. You can compute for the average collection period by dividing 365 by the accounts receivable turnover ratio. The result will show you how many days it takes for a company to collect accounts receivable, on average, over the period of one year.

Inventory Turnover Ratio

1. Locate the total Inventory in the Balance Sheet of the company you are analyzing.

2. Locate the total Cost of Goods Sold in the Income Statement of the company you are analyzing.

3. Refer to the formula for inventory turnover ratio in the previous section. Compute for inventory turnover ratio by dividing cost of goods by inventory. You may use a calculator or a Google Sheet. Make sure you only have two numbers after the decimal point.

4. Compare your results with an industry average.

5.Based on the ratio, you will be able to analyze the results as below:

a. A High ratio indicates that the business is buying or producing inventory at almost the same rate that the products get sold. This doesn't automatically mean that it's a good thing. It can indicate that the business doesn't have enough money to purchase additional Inventory or that they may not understand how large their market is and have potential customers that can no longer buy products because there isn't enough.

b. A Low ratio indicates that the business has more inventory than they can sell. This isn't necessarily a bad thing. It could mean that the business is preparing for an increase in sales in the near future. An example of this is most department stores before the Christmas season, stores generally get higher sales during this season so they stock up on Inventory before it to make sure that they can keep up with the demand of their customers.

6. You can compute for the average turnover period by dividing 365 by the inventory turnover ratio. The result will show you how many days it takes for a company to sell and replace inventory, on average, over the period of one year.