The final asset management ratio, the total assets turnover ratio, measures the turnover of all the firm's assets; it is calculated by dividing sales by total assets:
Total assets turnover ratio
Sales Total assets
5See FASB #89, Financial Reporting and Changing Prices (December 1986), for a discussion of the effects of inflation on financial statements.
MicroDrive's ratio is somewhat below the industry average, indicating that the company is not generating a sufficient volume of business given its total asset investment. Sales should be increased, some assets should be sold, or a combination of these steps should be taken.
Identify four ratios that are used to measure how effectively a firm is managing its assets, and write out their equations.
How might rapid growth distort the inventory turnover ratio?
What potential problem might arise when comparing different firms' fixed assets turnover ratios?
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