Asset management ratios

Asset management ratios are used to measure how effectively a firm manages its assets.

Remember, there are two slightly different equations that can be used to evaluate the management of a firms inventory. In either case, the inventory management ratio puts the inventory balance in the denominator and either its corresponding Sales value or the corresponding Cost of Goods Sold (COGS) value in the numerator. In the first (older) sales-based computation, the ratio identifies the number of sales dollars generated with each dollar of inventory held. The second, newer equationwhich places COGS in the numeratorcompares the costs of producing the firms goods with the amount of inventory held. Dont forget that the components of COGS are direct materials, direct labor, and the overhead associated with producing the firms goods and services. Therefore, the COGS-based version of the ratio compares the firms inventory with its costs, whereas the Sales-based version compares the inventory balance with the firms revenues and profits.

Now, consider the following case:

Tolbotics Inc. has a quick ratio of 2.00x, $32,175 in cash, $17,875 in accounts receivable, some inventory, total current assets of $71,500, and total current liabilities of $25,025. The company reported annual sales and cost of goods sold of $300,000 and $210,000, respectively, in the most recent annual report.

Over the past year, Tolbotics Inc. sold and replace its inventory times this year (using the sales-based inventory turnover ratio) and times per year (using the COGS-based ratio).

The sales-based inventory turnover ratio across companies in the industry is 11.89x. Based on this information, which of the following statements is true for Tolbotics Inc.?

Tolbotics Inc. is holding more inventory per dollar of sales compared to the industry average.

Tolbotics Inc. is holding less 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 $300,000 each. Youve gathered up company data to compare Like Games and Our Play. Last year, the average sales for industry competitors was $765,000. 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:

Data Collected (in dollars)
	Like Games	Our Play	Industry Average
Accounts receivable	8,100	11,700	8,625
Net fixed assets	165,000	240,000	650,250
Total assets	285,000	375,000	703,800

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

1. A days 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.