How to Measure Asset Management Ratios

The purpose of asset management or turnover ratios is to assess the financial health of a company.  The ratio consists of comparing the assets of that company to its sales revenue in order to indicate the effectiveness of revenue generation by leveraging available assets.  These ratios can be utilized by management to judge the effectiveness of the management team, and by investors to determine the overall financial health and direction of the company. 

There is a clear relationship between profit margins and turnover ratios.  If a company’s turnover ratio is low, profitability should be high.  If a company’s turnover ratio is high, profitability should be low.  Some typical ratios employed in analysis are fixed asset turnover, inventory turnover, and cash conversion cycle.

• Understand how to obtain the data in order to calculate the ratio.  Corporate assets can be found on the balance sheet, while gross and net income can be found on the income statement.  If you will be calculating these ratios on your own, be certain that you understand how to read and interpret corporate financial documents correctly.  If the data used to calculate the ratio is incorrect, the resulting ratio will also be incorrect.


• Compute the receivables turnover ratio.  This ratio measures how well a company is collecting on its outstanding receivables.  If sales are high, and receivables are low, this could indicate that the company has a high delinquency rate amongst its customer base.  This is exactly the scenario that this ratio will identify if it exists in the company.  Revised billing and collection policies are in order if this ratio is found to be high.


• Understand how to interpret the asset ratios once they are calculated.  A high turnover ratio means that the company is running efficiently, and is maximizing its assets in order to generate revenue.  When reviewing this ratio, be certain to compare asset turnover ratios within the same industry.  Profit margins vary from industry to industry, so do not make comparisons across industries.