Asset Turnover Ratios

Asset turnover ratios refer to the ratios describing the efficiency of a firm in utilizing the assets of the firm. The asset turnover ratios are also known as asset utilization ratios, efficiency ratios or management ratios. The two most famously used turnover ratios are inventory turnover ratios and receivables turnover ratios.

Receivables Turnover Ratios
The receivables turnover ratios give the value that is used to measure the effectiveness in collecting debts and extending the credit of a firm. The receivables turnover ratio can also be said as an activity ratio that gives some idea of a firm’s efficiency of using its own assets. The receivable turnover is also believed to indicate the firm’s efficiency of collecting the accounts receivables.

The mathematical formula of receivables turnover ratio is given by:

Receivable Turnover = annual credit sales / accounts receivable

The firms actually offer the loans that are interest-free to their clients while they maintain the accounts receivable by them.
When the receivable turnover ratio gives a high value, it can be implied that the company is efficient in collecting the extension of collection and credit accounts and also that the company is operating on the cash basis. On the other hand, a low value of receivable turnover ratio infers that the company is not getting the collection of imparted credit timely and hence should re-assess the credit policies of the company.
Inventory turnover Ratio
Inventory turnover ratio is another type of asset turnover ratio that is hugely used. The ratio is defined by the good’s selling cost in a particular time divided by the value of average inventory level of that particular time period.

The mathematical formula for inventory turnover ratio is:

Inventory Turnover = Cost of Products sold / Average Inventory

The mathematical representation of the average inventory is:

Average Inventory = (starting inventory + ending inventory) / 2

If the value of inventory turnover rate is low, it can be inferred that the company is experiencing excessive stock of products. It can also be concluded that both the products and the effort of marketing of the company are degenerating or lacking.

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Last Updated on : 27th June 2013

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