Assets Utilization. Making Conclusions
Category: Financial Control Management
Assets Utilization
The return on total assets depends on (1) getting the largest profit out of each dollar of sales and (2) obtaining the highest possible amount of sales per dollar of invested capital (net assets). The intensity with which assets are utilized is measured by means of Asset Turnover Ratios. That utilization has as its ultimate measure the amount of sales generated since sales are in most enterprises the fist and essential step to profits.
Changes in the basic turnover ratio that enters the determination of the ROI calculation, that is,
* — use of averages can be evaluated meaningfully only by an analysis of changes in the turnover rates of individual asset categories and groups that comprise the total assets:
Sales to Cash
Sales to Receivables
Sales to Inventories
Sales to Fixed Assets
Sales to Other Assets
Sales to Short-Term Liabilities
Making Conclusions
A detailed financial analysis has to be followed by a Summary and Conclusions section. It is advisable that this section precede the detailed analysis so that the reader is presented with material in the order of it importance to him or her.
A Bank Credit Officer that may be asked to extend short-term credit must take into consideration the character of management, past load experience, as well as the ongoing relationship with the loan applicant.
In addition to the foregoing intangibles, the Long-Term Lender will focus on such matters as security arrangements, provisions that safeguard the solvency of the recipient of the loan, and events risks.
The Equity Investor will pay most of the attention to the earning power of the business and in earning per share.
For the Company’s Owners the most important areas of interest will be presented by profitability ratios, followed by structure of capital and long-term solvency, operational performance and assets utilization.
The Management of the Company will direct its interest towards the cash flow generating capacity, the efficiency of working capital and assets utilization, and pledging the highest return on equity for the company’s owners.
Since the ultimate conclusions regarding problems are based on more than the data and facts brought out by financial analysis alone, it follows that the most useful way to present the results of financial analysis is to summarize them by listing of most relevant and salient points which were developed by the analysis and which the decision maker should consider.