Asset Management Ratios

Asset management ratios are methods that measure a company’s efficiency in utilizing its assets to expand the business and generate revenue. Asset management ratios measure the value of the company’s revenues concerning the value of the company’s assets. It shows how effectively the company’s management uses the assets for revenue generation.

Asset management ratios are computed for various assets. Examples of asset turnover ratios are inventory turnover, accounts payable turnover ratio, fixed assets turnover, days sales outstanding, cash conversion cycle, and accounts receivable turnover ratio. These ratios give information regarding company assets and show the company’s strengths and weaknesses.

What are the asset management ratios? 

• Asset management ratios 

Asset management ratios show a company’s effectiveness and ability to generate revenue using its assets. Below is a simple diagrammatic explanation.

Some of the common types of asset management ratios used in business are seen below.

• Fixed Asset Turnover Ratio 

This ratio measures a company’s efficiency and operational performance when using its fixed assets to generate sales revenue.  These fixed assets are plant, property, and equipment that are long-term assets that the asset management ratio prefers to use instead of short-term assets.

Higher fixed asset turnover ratios show that a company efficiently manages its fixed assets investments. However, there’s no exact number dictating a company’s efficiency in generating revenue from these fixed assets investments.

·        Inventory turnover ratio

This is another critical asset management ratio that is suitable for inventory management and shows how many times inventory is sold and restocked within a 365 days inventory turnover period. The ratio shows the efficiency of a company’s management in turning inventory into revenue. The faster a company converts inventory into revenue the better because the inventory turnover ratio improves.

If an inventory turnover ratio is too high, there is the risk of products for sale going out of stock. However, a low inventory turnover ratio shows slow-moving inventory. The inventory turnover needs to be at an optimum level.

·        Total asset turnover

The total asset turnover ratio measures a company’s efficiency using the company’s total assets to bring in sales revenue. The total asset turnover summarises all the asset management turnover ratios. If the company’s ratio is higher, it means that it is efficient in using all its assets to produce sales revenue within a year. The higher the asset management ratio, the better the company’s efficiency.

·        Receivables turnover

Receivables Turnover ratios measure the efficiency of a company to collect money from a credit sale. It shows the number of times the company can collect the accounts receivable balances and turn them into cash.

The higher the receivables turnover, the better because the average collection period from the accounts receivable is shortened, and the company receives its credits in good time. A shorter average collection period means the company can pay overheads like suppliers, salaries, and relevant taxes.

·        Working capital turnover ratios

The working capital turnover ratio shows a company’s efficiency in using its working capital to produce a sale. The higher the networking capital turnover ratios are the better as it shows how effective the company’s management strategy is in using capital to produce revenues.

·        Days sale in inventory

The day’s sale in inventory ratio is also an inventory-related asset management ratio. It shows how much time a company takes to sell all its inventory or how much time it can turn stocks into sales revenue. The shorter the time it takes the company to sell its stock the better as it means more revenue.

It then leads to the Days sales outstanding (DSO) which is the number of days a company takes to collect payment after a sale was made. The day’s sales outstanding could be monthly, quarterly, or annually and is a method of cash conversion after the inventory has been sold off.

Asset Bases

An asset base refers to a company’s assets that add value to a business or company. The value placed on the assets is not fixed, and it fluctuates as the asset base depreciates and appreciates in the market. It may also decrease or increase as a business buys or sells new assets.

A company’s asset base changes from time to time when it buys and sells its assets. However, significant changes in asset base affect its valuation and could be worrying to analysts. Once they have agreed to offer credit, lenders and financial institutions use physical assets as a guarantee. The physical assets guarantee that a portion of the money they lent is recouped once the asset is sold if the borrower fails to repay the loan.

A company’s valuation includes its asset base, which comprises the company’s total assets like property, equipment, cash, and securities. A company’s market value includes expected future growth stemming from profits and cash flows; hence the market value should be higher than the asset base.

Asset-based valuation

The asset-based valuation method is the most widely used since it is a comprehensive analysis of what belongs to the business. It’s an analysis of the assets and liabilities that appear on its balance sheet.

The asset-based valuation method utilizes the below considerations when valuing a company:

·        The type of company: The method is best adopted by companies that possess tangible and intangible assets. All businesses are asset operating companies and asset holding companies meaning they can use this method.

·        The company’s transactions: The asset-based valuation method is used for transactions that may be taxed to get financial backing. Different creditors place the value of the company’s assets differently from each other.

·        Business interests: The asset-based method is used during the buying or selling of the business or during mergers with other businesses, and it values the overall business. It can also be used when the business’s tangible and intangible assets are related to the price of the business.

·        Data availability: The amount of available information affects the analysis of the asset-based valuation method. Asset-specific information should be made available for this method to be used effectively.

Galaxygrades.com has a lot of information regarding the asset-based valuation approach. The approach is thoroughly preferred when valuing a business with a wide range of assets.

Current assets

Current assets belong to a company that it expects to convert into cash within one year through selling, consuming, or using. They are on a company’s balance sheet.

Examples of current assets include:

·        Inventory

·        Notes receivable

·        Marketable securities

·        Cash and cash equivalents

·        Short-term investments

·        Accounts receivable

·        Prepaid expenses such as insurance premiums that are yet to expire.

Current assets are critical in businesses as they fund their daily operating expenses and daily business operations. Current assets make up a company’s liquid assets as they can be easily converted into cash quickly.

However, not all the current assets can be liquidated quickly. Inventory such as heavy machinery or land can make up a company’s current assets but are not necessarily sold within a short period like fast-moving consumer goods.

Investment in assets

Investment assets are items that a business or an individual obtains to get additional income or an item that may be of value in the future. People make investments in assets such as stocks, bonds, mutual funds, or real estate.

Asset accounts

Asset accounts are general ledger accounts in a business that show the debit and credit amounts from its transactions to show the value of what the business owns. A few examples of such accounts are:

·        Accounts receivable

·        Cash

·        Prepaid expenses

·        Buildings

·        Inventory

·        Vehicles

·        Equipment.

Tangible assets

Tangible assets are assets that have monetary value and take a physical form. Tangible assets can be used to gain monetary value during transactions.

What is the formula for asset management ratio? 

• Asset management ratios 

The asset management ratio indicates that an effective company can use its assets to generate revenue. The asset management ratio measures the company’s efficiency in using its total assets for business expansion.

• Asset turnover ratio 

This asset management ratio is best described diagrammatically as below:

• Fixed Asset Turnover Ratio 

The Fixed Asset Turnover Ratio is used to measure a company’s efficiency and operational performance when its fixed assets are used to generate sales revenue.  A higher fixed asset turnover ratio shows that a company efficiently manages its fixed assets investments.

• Asset bases 

A company’s asset bases are the assets that a company holds that add value to a business or company.

• Current assets 

These are the assets belonging to a company that it expects to convert into cash within one year through selling, consuming or using.

• Investment in assets 

Investment in assets is when a business obtains assets to get additional income or invests in an item that may be of value in the future.

• Asset accounts 

These are accounts in a business that show the debit and credit amounts from its transactions to show the value of the business’s average total assets.

• Tangible assets

Tangible assets are assets that have monetary value and take a physical form. Tangible assets can be used to gain monetary value during transactions.

What are the five major categories of ratios? 

The five major categories of asset management ratios are:

• Profitability ratios
• Activity ratios
• Liquidity ratios
• Debt ratio
• Market ratios.

Is a high turnover ratio good? 

A high turnover ratio shows a company’s efficiency in managing fixed assets investments; hence it is quite good for the company.

• Capital turnover ratio 

The working capital turnover is an asset management ratio that shows how efficiently a company uses its working capital to produce a sale.

• Average working capital 

The average working capital show how well a company is doing in the short-term and how efficient its operations are.

• Additional capital 

Additional capital is the contribution that a partner makes in addition to the initial contribution to the business’s equity that the partner had made.

• Capital management 

Capital management is a strategy that ensures that a company’s cash flow is utilized at maximum efficiency.

• Capital turnover 

The capital turnover is an asset management ratio that shows a company’s efficiency in using its working capital to produce a sale.

• Financial capital 

Financial capital is a resource used to buy what is needed for a business to provide its services effectively.

• Capital Intensive 

This business process needs a large investment to effectively provide its services.

• Capital market 

These are markets whereby investments are exchanged between investors who have capital and investors who need capital to start or grow their business.

• Capital ratio 

This asset management ratio is whereby a financial institution gives out shares and retains profits to finance its operations.

What is a good current ratio? 

This is whereby a company uses its capital effectively and has adequate cash to run its operations and meet its liabilities.

What is the ideal profitability ratio?

These are measurements that gauge a business’s ability to create profits relative to its revenue.

What are the debt management ratios? 

These are asset management ratios that gauge how much of a business’s operations arise from debt instead of other types of financing. There are many aspects to debt management, such as the ones below.

• Credit policies 

These are guidelines that set credit terms within a business that show customers the amount of credit granted to them and the course of action that will be taken in case of late payment. Good credit policies ensure a high receivable turnover asset management ratio.

• Credit sales 

This is whereby goods or services are sold to a customer, and payment is made later.

• Base on credit problems 

The bases of credit are collateral, capacity, capital, character, and conditions. These Five Cs usually undergo problems with clients who fail to uphold them.

• Credit accounts 

Credit accounts are a formal agreement between a customer and a service provider whereby the customer can take goods or services and pay for them later.

• Bad credit policy 

This is when a company sets credit terms that are not favorable to a business, and no course of action is taken in case of late payment.

• Credit account sales 

Credit account sales are the sales made after a supplier agrees to provide a customer with goods or services that the customer can pay for later.

• Credit period 

A credit period means the number of days clients can take before they pay an invoice for the day’s sales outstanding.

• Credit terms 

Credit terms are an agreement made by the buyer and seller of goods or services that shows the amount of payment to be made and the timings of these payments because the goods or services are bought on credit.

• Creditworthy

Creditworthy is a term used to describe a person or company worth receiving credit due to their reliability in paying back debt in the past.

• Cash flow 

Cash flow is the amount of cash that flows in and out of a business

• Assets into cash 

Assets that can be converted into cash quickly are known as liquid assets. Companies use these assets in generating cash for their daily operations.

• Additional cash flow 

Additional cash flow means the money from a sale before an account funds its investment in the project.

• Cash basis 

This accounting method recognizes revenues and expenses when cash is exchanged.

• Cash burn

Cash burn is the amount equal to the previous financial period’s cashless the current financial period’s cash, adjusted for changes to the cash due to borrowing and repaying loans.

• Cash conversion cycle 

A cash conversion cycle is a tool that measures the number of days a company can convert cash into inventory.

• Cash crunch 

A cash crunch is whereby a business is low on cash such that the company’s operations are affected negatively.

• Cash from accounts

This is the cash that comes into the organization from various accounts.

In summary, these are all terms and tools related to asset management for businesses. Log into galaxygrades.com and make an order to receive adequate knowledge and training on the various aspects of asset management ratios.