AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 58 :20.09.2020
Financial Ratios
Management Efficiency Ratios
Last week we had seen details about
Return on Equity (ROE), Return on Capital Employed (ROCE) and Return on Asset
(ROA). This week we shall try to understand Liquidity Ratios.
This week we shall try to understand some other
Management Efficiency Ratios like Total Asset Turnover Ratio, Inventory
Turnover Ratio and Inventory Number of Days.
Total Asset Turnover Ratio :
The total asset turnover ratio is
the ratio of net sales to the total assets of the company which
include both the fixed assets and the current assets.
Total Asset Turnover Ratio =
Net Sales / Average Total Assets
This ratio is used to measure how efficiently a company can use its assets to generate sales.
Inventory Turnover Ratio :
Inventory turnover ratio is the
ratio of Cost of Goods Sold to the Average Inventory. This ratio helps us to
analyze how popular are companies products. If the company's products are
really popular the inventory turnover ratio would be high otherwise it will be
low.
Inventory Turnover Ratio = Net Sales / Average Inventory Like most other financial ratios, you should compare this ratio with the same ratio for the competitor company only.
Inventory Number of Days :
Inventory Number of Days tells us about how much time (days) the company takes to convert its inventory into cash.
Inventory Number of Days = 365 / Inventory Turnover Ratio
On one hand, a lower number can
indicate that company's products are fast moving and popular which is a good sign but on other hand it can
also indicate that the company has a limited production
capacity which is not a good sign. This can be due to inability to expand
business due to shortage of funds or inability
to raise fresh money, shortage of raw materials, etc.
You can come to know about such production
capacity related issues only by reading the annual report of the company in
details. If you find any such issues then you need to be careful while investing.
Hence as a thumb rule, try to check production details whenever you see an
impressive Inventory Number of Days figure.
Like most other financial ratios, you should
compare this ratio with the same ratio for the competitor company only.
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