3. Asset management ratios

Asset management ratios are used to measure how effectively a firm manages its assets, by relating the amount a firm has invested in a particular type of asset (or group of assets) to the amount of revenues the asset is generating. Examples of asset management ratios include the average collection period (also called the days sales outstanding ratio), the inventory turnover ratio, the fixed asset turnover ratio, and the total asset turnover ratio.

Consider the following case:

Adams Furniture has a quick ratio of 2.00x, $37,575 in cash, $20,875 in accounts receivable, some inventory, total current assets of $83,500, and total current liabilities of $29,225. The company reported annual cost of goods sold of $100,000 in the most recent annual report.

Over the past year, how often did Adams Furniture sell and replace its inventory?

2.86 x

3.99 x

4.39 x

8.01 x

The inventory turnover ratio across companies in the furniture industry is 3.39x. Based on this information, which of the following statements is true for Adams Furniture?

Adams Furniture is holding less inventory per dollar of sales compared to the industry average.

Adams Furniture is holding more inventory per dollar of sales compared to the industry average.

You are analyzing two companies that manufacture electronic toysLike Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $100,000 each. Youve collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $255,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. Youve collected data from the companies financial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.)

Data Collected (in dollars)

	Like Games	Our Play	Industry Average
Accounts receivable	2,700	3,900	3,850
Net fixed assets	55,000	80,000	216,750
Total assets	95,000	125,000	234,600

Using this information, complete the following statements to include in your analysis.

1. A days of sales outstanding represents an efficient credit and collection policy. Between the two companies, is collecting cash from its customers faster than , but both companies are collecting their receivables less quickly than the industry average.

2. Our Plays fixed assets turnover ratio is than that of Like Games. This could be because Our Play is a relatively new company, so the acquisition cost of its fixed assets is than the recorded cost of Like Gamess net fixed assets.

3. Like Gamess total assets turnover ratio is , which is than the industrys average total assets turnover ratio. In general, a higher total assets turnover ratio indicates greater efficiency.