Activity Ratios: How Well Does the Company Employs Its Assets? The second basic type of financial ratio is the activity ratio. Activity ratios indicate how well a company employs its assets. Ineffective utilization of assets results in the need for more finance, unnecessary interest costs, and a correspondingly lower return on capital employed. Furthermore, low activity ratios or deterioration in activity ratos may indicate uncollectible accounts receivablece obsolete inventory or equipment Total asset turnover measures the company's effectiveness in utilizing its total assets and is calculated by dividing total assets into sales. Net sales Total assets 1. Total asset turnover for SciTronics in 2008 can be cakulated by dividings into The tumover improved/deteriorated from times in 2005 to times in 2008 It is useful to examine the turnover ratios for each type of asset, since the use of total assets may hide important problems in one of the specific asset categories. One important category is accounts receivables. The average collection period measures the number of days the company must wait, on average, between the time of a sale and when it is paid. The average collection period is calculated in two steps. First, divide annual credit sales by 365 days to determine the average sales per day Net credit sales 365 days This count is thered for only by one way in Corporate Finance by WELLIAM COFFING. Gdy Beacon College inction 2000 Des 2000 For the exclusive use of M. Turay, 2020. Amering Company's future Financial Health Then, divide the accounts receivable by the average credit sales per day to determine the number of days of sales that are still unpaid: Accounts receivable Credit sales per day 2 SciTronics had ___ invested in accounts receivables at year-end 2005. Its average sales per day were $ _during 2008 and its average collection period was_days. This represented an improvement/deterioration from the average collection period of days in 2005 A third activity ratio is the inventory turnover ratio, which indicates the effectiveness with which the company is employing inventory. Since inventory is recorded on the balance sheet at cost (not at its sales value. It is advisable to use cost of goods sold as the measure of activity. The inventory tumover figure is calculated by dividing cost of goods sold by inventory Cost of goods sold Inventory 3. SciTronics apparently needed so inventory at year-end 2008 to support its operations during 2008. Its activity during 2008 as measured by the cost of goods sold was $It therefore had an inventory turnover of times. This represented an improvement/deterioration from times in 2005. An alternative measure of inventory management is days of inventory, which can be calculated by dividing the cost of goods sold by 365 days to determine the average cost of goods sold per day. Days of inventory is calculated by dividing the total inventory by the cost of goods sold per day A fourth and final activity ratio is the fixed asset turnover ratio, which measures the effectiveness of the company in utilizing its plant & equipment: Net sales Netfied assets 4. SciTronics had net fixed assets of and sales of $_ in 2005. Its fixed asset turnover ratio in 2008 was times, an improvement deterioration from times in 2005 BE2! . . Normal 1 No Spaci... Heading 1 Heading 2 Title Paragraph Styles Financial ratios and financial analysis 1. My assessment of the performance of Scitronics during the 2005-2008 period is that there is a decent increase in sales growth and profit over the four year period. They are doing pretty well business wise. 2. Its financial strength and its access to external sources of finance improved from $61,000 to $75,000. However reliance on long term debt has lessened over the years. Therefore; the company is using less leverage in its financing. 3. As a result of my analysis I would have a few questions to ask management. What was the reason for the lessened use of leverage over the last few years? Is the company facing any trouble in debt repayment? Why isn't more debt deployed? Leverage Ratios pg-9 Activity Ratios: How Well Does the Company Employs Its Assets? The second basic type of financial ratio is the activity ratio. Activity ratios indicate how well a company employs its assets. Ineffective utilization of assets results in the need for more finance, unnecessary interest costs, and a correspondingly lower return on capital employed. Furthermore, low activity ratios or deterioration in activity ratos may indicate uncollectible accounts receivablece obsolete inventory or equipment Total asset turnover measures the company's effectiveness in utilizing its total assets and is calculated by dividing total assets into sales. Net sales Total assets 1. Total asset turnover for SciTronics in 2008 can be cakulated by dividings into The tumover improved/deteriorated from times in 2005 to times in 2008 It is useful to examine the turnover ratios for each type of asset, since the use of total assets may hide important problems in one of the specific asset categories. One important category is accounts receivables. The average collection period measures the number of days the company must wait, on average, between the time of a sale and when it is paid. The average collection period is calculated in two steps. First, divide annual credit sales by 365 days to determine the average sales per day Net credit sales 365 days This count is thered for only by one way in Corporate Finance by WELLIAM COFFING. Gdy Beacon College inction 2000 Des 2000 For the exclusive use of M. Turay, 2020. Amering Company's future Financial Health Then, divide the accounts receivable by the average credit sales per day to determine the number of days of sales that are still unpaid: Accounts receivable Credit sales per day 2 SciTronics had ___ invested in accounts receivables at year-end 2005. Its average sales per day were $ _during 2008 and its average collection period was_days. This represented an improvement/deterioration from the average collection period of days in 2005 A third activity ratio is the inventory turnover ratio, which indicates the effectiveness with which the company is employing inventory. Since inventory is recorded on the balance sheet at cost (not at its sales value. It is advisable to use cost of goods sold as the measure of activity. The inventory tumover figure is calculated by dividing cost of goods sold by inventory Cost of goods sold Inventory 3. SciTronics apparently needed so inventory at year-end 2008 to support its operations during 2008. Its activity during 2008 as measured by the cost of goods sold was $It therefore had an inventory turnover of times. This represented an improvement/deterioration from times in 2005. An alternative measure of inventory management is days of inventory, which can be calculated by dividing the cost of goods sold by 365 days to determine the average cost of goods sold per day. Days of inventory is calculated by dividing the total inventory by the cost of goods sold per day A fourth and final activity ratio is the fixed asset turnover ratio, which measures the effectiveness of the company in utilizing its plant & equipment: Net sales Netfied assets 4. SciTronics had net fixed assets of and sales of $_ in 2005. Its fixed asset turnover ratio in 2008 was times, an improvement deterioration from times in 2005 BE2! . . Normal 1 No Spaci... Heading 1 Heading 2 Title Paragraph Styles Financial ratios and financial analysis 1. My assessment of the performance of Scitronics during the 2005-2008 period is that there is a decent increase in sales growth and profit over the four year period. They are doing pretty well business wise. 2. Its financial strength and its access to external sources of finance improved from $61,000 to $75,000. However reliance on long term debt has lessened over the years. Therefore; the company is using less leverage in its financing. 3. As a result of my analysis I would have a few questions to ask management. What was the reason for the lessened use of leverage over the last few years? Is the company facing any trouble in debt repayment? Why isn't more debt deployed? Leverage Ratios pg-9