AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 58 :20.09.2020

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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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