Asset and Inventory Ratios

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Asset and Inventory Ratios

Asset turnover ratios indicate of how efficiently the firm utilizes its assets. They sometimes are referred to as efficiency ratios, asset utilization ratios, or asset management ratios.

Plant and Equipment Annual Change:
If a company invests in a new plant or equipment, sales should increase once the plant/equipment is on line. A decrease in PP&E may not speak well for future growth of the company. Look at the long term trend. If the company has been spending heavily in the past few years, perhaps additional PP&E expenditures are no longer necessary to provide a future need. Spending for PP&E in a weak economy may indicate management is taking the long-term view, preparing to take market share when the economy improves. You need to decide which is the case.

Inventory Turnover Ratio:
The higher the ratio the better, generally. Indicates quality merchandise & proper pricing. Also note the number of days Inventories are held before they become a product and sold (See "Inventories" in the "Efficiency Ratio" section). A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or On the other hand, an unusually high ratio compared to the average for your industry could mean a business is losing sales because of inadequate stock on hand.

Cost of Sales	= Inventory Turnover Ratio

Inventory

Plant Turnover Ratio
The higher the ratio the better. If plant or equipment are added, sales should increase. Be aware it takes time for a new plant to come on line and benefit sales. Check to see what the funds for PP&E were spent for.

Sales	= Plant Turnover Ratio

Prop. Plant & Equip.