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Ratio Analysis
Analysis of Asset Utilization Ratios
 
  General Explanation

Asset utilization ratios provide a measure of how well assets are utilized. Since the objective of any business is to maximize profits to the extent possible from available assets, a larger ratio generally indicates the efficient use of the company's assets. A low turnover ratio may indicate poor management of the company's assets or idle assets.

 
  Asset Utilization Ratios  
 

Sales to
cash and equivalents

 Fluctuations from period to period in the sales to cash ratio may indicate the existence of idle cash balances if the ratio is too low or the existence of cash flow problems if the ratio is too high.
 		  

Sales to
accounts receivable

A company's policies on the extension of credit and collection efforts directly affect this ratio. A high ratio may indicate that stringent credit policies are followed or in extreme cases that credit policy is too tight. A low ratio usually indicates that the company is doing a poor job enforcing collections.
 

Sales to inventory

 Since the management of inventory directly affects a company's sales and profits, proper management is required to prevent lost sales from insufficient quantities of inventory or lost profits from too much inventory and subsequent mark-downs in price.
 

Sales to
working capital

Working capital is defined as current assets minus current liabilities. Sales to working capital is a direct indication of the utilization of the company's liquid assets.
 

Sales to
net fixed assets

Since the adequacy of property, plant and equipment determine a company's long-term competitive position, changes in trends of sales to fixed assets provide indications of a company's long-term competitiveness. This ratio tends to change in large jumps due to the nature of large capital expenditures. Conditions of inadequate capital assets or major replacements should be apparent from changes in this ratio over time.
 
Sales to
total fixed assets 		The ratio between sales and total assets reflects the overall efficiency of the company's utilization of assets.

 

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