Asset Management Ratios, Essay Example

Asset management ratios provide us with a great wealth of information about an organization. First of all, ratios like fixed turnover ratio tell us how efficiently an organization utilizes its assets to generate revenues. In addition, they help us separate more efficient assets from less efficient assets and make it possible to allocate our limited resources more efficiently. Asset management ratios like receivables turnover also help us better understand the liquidity status of the organization(Lane) which could go a long way towards implementing more efficient receivables management policies. Ratios like inventory turnover give us a glimpse into our inventory management policies and may inspire us to reduce inventory in order to improve both profitability and asset utilization rates. Moreover, asset management ratios also give us insights into the asset composition of the organization which helps investors better understand the strategic vision of the management.

Leverage ratios help us understand the sources of funds utilized by the company, particularly debt funding. In addition to debt burden or financial leverage, leverage ratios also look at the organization’s ability to meet its liabilities such as interest obligations. Leverage ratios also help us determine the ability of the organization to carry out its daily operations and alert us to potential liquidity issues facing the organization(Investopedia). Thus, leverage ratios are important to the stakeholders such as investors to better understand the risk profile of the organization under investigation. Those who may want to better understand the cash flow position of the company would also benefit from studying leverage ratios. In short, just as asset management ratios look at how well an organization manages its assets, leverage ratios look at how well an organization manages its risk profile.

References

Investopedia. (n.d.). Leverage Ratio. Retrieved August 15, 2014. Web.

Lane, M. A. (n.d.). Asset Management Ratios. Retrieved August 15, 2014. Web.