- Activity ratios (28): Give indication of how well a firm utilizes various asset
- Asset utilization
- Turnover ratios
- Receivables turnover (29) (measure of accounts receivable turnover)
- Average = beginning of year account + end of year account/2
- Measures how many times a business can collect its average accounts receivable during the year.
- Average collection period (30), Days of sales outstanding: average number of days it takes for customers to pay bills
- Inventory turnover (31): measure firm’s efficiency with respect to its processing and inventory management
- Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a given period
- Days of inventory on hand (32)
- Should have days of inventory on hand close to industry norm
- Too low → the firm has inadequate stock on hand, too high → too much capital is tied up in inventory
- Payables turnover (33): how many times a company makes a purchase
- Number of days of payable(34): average amount of time the firms take to pay its bills
- Total asset turnover (35): indicate how effective the firm use its asset. Show how many sales are generated from each dollar of company assets.
- Different industries → different turnover ratios
- Manufacturing: asset turnover ratios = 1
- the company is generating 1 dollar of sales for every dollar invested in assets.
- Retail business might have turnover ratios = 10
- Low asset turnover: too much capital tied up in asset base
- High turnover rate: too few assets for potential sales
- Fixed asset turnover (36): how many times a fixed asset can contribute to revenue
- It is desirable to have fixed asset turnover ratio close to industry norm
- Too low: too much fixed asset or using fixed asset inefficiently
- Too high: Has obsolete equipment
- Have to incur capital expenditure in the near future to support growing revenues
- Working capital turnover (37): How effectively a company is using its working capital.
- Working capital: current assets – current liabilities
- Low working capital
- Outstanding payables >= inventory or receivables → capital turnover ratio will be very large.
