Question

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:

Monroe Manufacturing has a quick ratio of 2.00x, $28,125 in cash, $15,625 in accounts receivable, some inventory, total current assets of $62,500, and total current liabilities of $21,875. The company reported annual sales of $200,000 in the most recent annual report.

Over the past year, how often did Monroe Manufacturing sell and replace its inventory?

8.01x

11.74x

2.86x

10.67x

The inventory turnover ratio across companies in the manufacturing industry is 9.0695x. Based on this information, which of the following statements is true for Monroe Manufacturing?

Monroe Manufacturing is holding more inventory per dollar of sales compared with the industry average.

Monroe Manufacturing 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.	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.

Answer 1

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