Reporter: MORAÑA, MIKAELA MIKEE P.

Topics:

 ASSET MANAGEMENT RATIOS

o Inventory Turnover Ratio
o Days Sales Outstanding
o Fixed Assets Turnover Ratio
o Total Assets Turnover Ratio

Learning Outcomes:

 To define and analyze the concept of asset management ratios

 To compute and distinguish the different types of asset management ratios

BOOK REFERENCES:

Brigham, E. F., Houston, J. F., Jun-ming, H., Kee, K. Y., & Ariffin, A. N. B. (2019).
Essentials of Financial Management (4th ed.). Taguig, Philippines: Cengage Learning.

Brigham, E. F., & Ehrhardt, M. C. (2010). Financial management: Theory and practice
(13th ed.). Mason, Ohio: Cengage Learning

Gitman, L. J., & Zutter, C. J. (2015). Principles of Managerial Finance (14th

ed.). Harlow, England: Pearson Education Limited.

Gitman, L. J. (2002). Principles of Managerial Finance (10th ed.). Boston, Massachusetts:

Addison Wesley

Paramasivan, C., & Subramanian, T. (2009). Financial Management. New

Dehli, India: New Age International, Limited.

ONLINE REFERENCES

Carlson, R. (2019, February 7). How to Use Asset Management Ratios in Financial
RatioAnalysis. Retrieved from https://www.thebalancesmb.com/use-asset-management-ratios-in-
financial-ratio-analysis-393187

Hayes,A (2019,January 25). Asset Turnover Ratio Definition. Retrieved from

https://www.investopedia.com/terms/a/assetturnover.asp
Inventory Turnover Ratio.(n.d). Retrieved from https://www.myaccountingcourse.com/financial-
ratios/inventory-turnover-ratio

What is Fixed Asset Turnover?.(n.d). Retrieved from

https://corporatefinanceinstitute.com/resources/knowledge/finance/fixed-asset-turnover/

Beers, B. (219, February 4). How Is Asset /how-asset-turnover-calculated.aspTurnover

Calculated?. Retrieved from https://www.investopedia.com/ask/answers/032415

I. ASSET MANAGEMENT RATIOS

 Asset management ratios are the key to analyzing how effectively and efficiently the
firm managing its assets to produce sales.
 It is a set of ratios that measures how effectively a firm is managing itself.
(Gitman,2002, p. 114)
 It will also known as " ASSET TURNOVER RATIOS AND ASSET EFFICIENCY
RATIOS"
 It answers the question, does the amount of each type of asset seen reasonable, too
high, too low in view of current and projected sales?
 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.
 Low asset turnover ratios mean inefficient utilization of assets. Low asset turnover
ratios mean that the company is not managing its assets wisely.
II. TYPES OF ASSET MANAGEMENT RATIOS
a. INVENTORY TURNOVER RATIO
 Definition:
o Inventory turnover is a measure of the number of times inventory
is sold or used in a time period, such as a year. (Carlson, 2019)
o Normally a high number indicates a greater sales efficiency and a
lower risk of loss through un-saleable stock.
o A low inventory turnover may be the result of ineffective inventory
management (that is, carrying too large an inventory) and poor
sales or carrying out-of-date inventory to avoid writing off
inventory losses against income.
o It has two problems: Sales are started at market prices and Sales
occur over the entire year
 FORMULA
Inventory Turnover Ratio = SALES / INVENTORY

b. DAYS SALES OUTSTANDING

 Definition:
 o Days sales outstanding is also called DSO or days receivables.
o It is a calculation used by a company to estimate their average
collection period.
o It is a financial ratio that illustrates how well a company’s accounts
receivables are being managed. (Brigham, 2019)
o The days sales outstanding analysis provides general information
about the number of days on average that customers take to pay
invoices.
 FORMULA

DSO ratio = accounts receivable / average sales per day, or

DSO ratio = accounts receivable / (annual sales / 365 days)
c. FIXED ASSET TURNOVER RATIO
 Definition:
o Fixed-asset turnover is the ratio of sales to value of fixed assets,
indicating how well the business uses fixed assets to generate
sales. (Gitman,2002, p. 116)
o The higher the ratio, the better, because a high ratio indicates the
business has less money tied up in fixed assets for each unit of
currency of sales revenue.
o A declining ratio may indicate that the business is over-invested in
plant, equipment, or other fixed assets.
o also called "FIXED ASSETS UTILIZATION RATIO"
 FORMULA

Fixed Asset Turnover = Sales/Net Fixed Assets

d. TOTAL ASSETS TURNOVER RATIO

 Definition:
o The total asset turnover ratio is the asset management ratio that is
the summary ratio for all the other asset management ratios.
o This is a financial ratio that measures the efficiency of a
company’s use of its assets in generating sales revenue or sales
income to the company.
o Companies with low profit margins tend to have high asset
turnover, while those with high profit margins have low asset
turnover.
 FORMULA
Total Asset Turnover = Sales/Total Assets

III. SUMMARY
Asset management ratios are the key to analyzing how effectively and efficiently
the firm is managing its assets to produce sales. They indicate the ability of a
company to translate its assets into the sales. 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.