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:
Walker Telecommunications has a quick ratio of 2.00x, $35,550 in cash, $19,750 in accounts receivable, some inventory, total current assets of $79,000, and total current liabilities of $27,650. The company reported annual sales of $200,000 in the most recent annual report.
Over the past year, how often did Walker Telecommunications sell and replace its inventory?
2.86x
9.28x
8.01x
8.44x
The inventory turnover ratio across companies in the telecommunications industry is 9.284x. Based on this information, which of the following statements is true for Walker Telecommunications?
1. Walker Telecommunications is holding more inventory per dollar of sales compared with the industry average.
2. Walker Telecommunications is holding less inventory per dollar of sales compared with the industry average.
3. You are analyzing two companies that manufacture electronic toys—Like 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 $200,000 each. You’ve collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $510,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You’ve 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 5,400 7,800 7,700
Net fixed assets 110,000 160,000 433,500
Total assets 190,000 250,000 469,200
Using this information, complete the following statements to include in your analysis.
1. Our Play has days of sales tied up in receivables, which is much than the industry average. It takes Our Play time to collect cash from its customers than it takes Like Games.
2. Like Games’s fixed assets turnover ratio is than that of Our Play. This is because Like Games was formed eight years ago, so the acquisition cost of its fixed assets is recorded at historic values when the company bought its assets and has been depreciated since then. Assuming that fixed assets prices (not book values) rose over the past six years due to inflation, Our Play paid a amount for its fixed assets.
3. The average total assets turnover in the electronic toys industry is , which means that of sales is being generated with every dollar of investment in assets. A total assets turnover ratio indicates greater efficiency. Both companies’ total assets turnover ratios are than the industry average.