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Analysis of Financial Statements - Asset Management Ratios

5 important questions on Analysis of Financial Statements - Asset Management Ratios

What are asset management ratios?

Ratios, which give an idea of how efficiently the firm is using its assets.
Good asset management ratios are necessary for the firm too keep its costs low and thus its net income high.

What are the consequences of having too many assets?

The cost of capital will be too high, which will depress profits.

What are the consequences of having too little assets?

Profitable sales will be lost.

How is days sales outstanding calculated?

receivables
------------------- = days
(annual sales/365)

or

(365 x receivables)
------------------ = days
annual sales

What is the problem with the fixes assets turnover ratio?

Fixed assets are shown on the balance sheet: historical costs - depreciation.
Inflation has caused the value of many assets that were purchased in the past to be seriously understated.

Therefore, if an old firm whose fixed assets have been depreciated is compared with a new firm with similar operations that acquired its fixed assets only recently, the old firm will probably have the higher fixed assets turnover ratio.

However, this would be more reflective of the age of the assets than of inefficiency on the part of the new firm.