Question

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:

Franklin Aerospace has a quick ratio of 2.00x, $36,225 in cash, $20,125 in accounts receivable, some inventory, total current assets of $80,500, and total current liabilities of $28,175. The company reported annual sales of $200,000 in the most recent annual report.

Over the past year, how often did Franklin Aerospace sell and replace its inventory?

9.11x

8.28x

2.86x

8.01x

The inventory turnover ratio across companies in the aerospace industry is 9.108x. Based on this information, which of the following statements is true for Franklin Aerospace?

Franklin Aerospace is holding more inventory per dollar of sales compared with the industry average.

Franklin Aerospace is holding less inventory per dollar of sales compared with the industry average.

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.	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 Play’s 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 Games’s net fixed assets.
3.	Like Games’s total assets turnover ratio is ______ , which is _____ than the industry’s average total assets turnover ratio. In general, a higher total assets turnover ratio indicates greater efficiency.

Answer choices

1A. High or Low

1B. Like Games or Our Play

1C. Our play Or Likes Games

2A. Lower or Higher

2B. Higher or Lower

3A. 1.05X or 0.80X

3B Lower or Higher

Answer 1

Answer a.

Current assets = Cash + Accounts receivable + Inventory
$80,500 = $36,225 + $20,125 + Inventory
Inventory = $24,150

Inventory turnover = Sales / Inventory
Inventory turnover = $200,000 / $24,150
Inventory turnover = 8.28 x

Answer b.

Franklin Aerospace is holding more inventory per dollar of sales compared to the industry average.

Answer c.

Like Games:

Days of sales outstanding = 365 * Accounts receivable / Sales
Days of sales outstanding = 365 * $5,400 / $200,000
Days of sales outstanding = 9.86 days

Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $200,000 / $110,000
Fixed assets turnover = 1.82 times

Total assets turnover = Sales / Total assets
Total assets turnover = $200,000 / $190,000
Total assets turnover = 1.05 times

Our Play:

Days of sales outstanding = 365 * Accounts receivable / Sales
Days of sales outstanding = 365 * $7,800 / $200,000
Days of sales outstanding = 14.24 days

Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $200,000 / $160,000
Fixed assets turnover = 1.25 times

Total assets turnover = Sales / Total assets
Total assets turnover = $200,000 / $250,000
Total assets turnover = 0.80 times

Industry Average:

Days of sales outstanding = 365 * Accounts receivable / Sales
Days of sales outstanding = 365 * $7,700 / $510,000
Days of sales outstanding = 5.51 days

Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $510,000 / $433,500
Fixed assets turnover = 1.18 times

Total assets turnover = Sales / Total assets
Total assets turnover = $510,000 / $469,200
Total assets turnover = 1.09 times

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

Our Play’s fixed-asset turnover ratio is lower than that of Like Games. This could be because Our Play is a relatively new company, so the acquisition costs of its fixed assets is higher than the recorded cost of Like Games’s net fixed assets.

Like Games’s total asset turnover ratio is 1.05, which is lower than the industry’s average total asset turnover ratio. In general, a higher total asset turnover ratio indicates greater efficiency.