Financial Ratios Investopedia Free Essay Example

The financial ratios help decision makers such as investors, management and research analysts to analyze and evaluate the financial statements of a company.

There are various ratios that indicate different aspects of a company like liquidity ratios, asset activity ratios, debt management ratios, profitability ratios and market value ratios. The asset activity ratios of a firm are calculated here through the financial information provided. Asset Activity Ratios The asset activity ratios help in measuring the effectiveness and efficiency of management in utilizing the assets of a company.

There are various asset activity ratios such as inventory turnover, inventory period, receivables turnover, average collection period, fixed assets turnover, and total assets turnover. The asset management ratios calculated here are inventory turnover, average collection period and total asset turnover.

Average Collection Period

The Average Collection Period also referred to as Days Sales Outstanding – DSO is used to measure the time it takes for a company to recover the amount outstanding in accounts receivables.

The Average Collection Period is calculated by the following formula (Brigham & Ehrhardt, 2001):

Receivables Average Collection Period = Annual Sales / 365 From the provided data we know that, Amount in 000’s Annual Sales = 2004.

016 Receivables = 55. 514 55. 514 Average Collection Period = 2004. 016 / 365 Average Collection Period = 10. 11 10

Days Inventory Turnover Ratio

The inventory turnover ratio helps measure efficiency a company has in managing inventories. The inventory turnover ratio indicates the number of times the company converts inventory into finished goods and eventually sells the finished goods.

The inventory turnover ratio can be calculated by using the following formula (Investopedia, 2009): Sales Inventory Turnover Ratio = Inventories From the provided data we know that, Amount in 000’s Sales = 2004. 016 Inventories = 141. 35 2004. 016 Inventory Turnover Ratio = 141. 35 Inventory Turnover Ratio = 14. 18 times Total Asset Turnover The total asset turnover ratio measures the efficiency of the management in utilizing total assets of the company for sales. It can be calculated by the following formula (Rao, 1989): Sales Total Asset Turnover Ratio = Total Assets

From the financial information provided we know that, Amount in 000’s Sales = 2004. 016 Total Assets = 1117. 96 2004. 016 Total Asset Turnover Ratio = 1117. 96 Total Asset Turnover Ratio = 1. 79 1. 8 times

References

1. Brigham, E. , & Ehrhardt, M. (2001). Financial Management: Theory and Practice 11th Edition. Florence: South-Western Educational Publishing.
2. Investopedia. (2009). Inventory Turnover. Retrieved June 17, 2009, from Investopedia. com: http://www. investopedia. com/terms/i/inventoryturnover. asp
3. Rao, R. (1989). Fundamentals of Financial Management. New York: Macmillan Publishing Company.

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