Calculate the average life, average age, and asset turnover ratios. Discuss what each ratio tells you in the context of your chosen company.

(Discussion Question Two)

You may consider using the same company and annual report that you chose for your Week 1 Discussion Forum, Reading and Using the Annual Report Case Study. This choice will work only if the company is using the straight-line depreciation method. The companys choice of depreciation method can be located in the notes to the financial statement in the annual report. If the company does not use this method or does not have long-term assets, you will need to choose another company. Select a company that a fellow student has not already posted.

Using your selected companys financial statement,

Calculate the average life, average age, and asset turnover ratios. Discuss what each ratio tells you in the context of your chosen company.

Calculate the accounts receivable turnover ratio and convert that ratio into days. Discuss what each ratio tells you in the context of your chosen company.

Your initial response should be a minimum of 200 words. Graduate school students learn to assess the perspectives of several scholars. Support your response with at least one scholarly and/or credible resource, in addition to the text.

KEY TAKEAWAYS BEFORE ATTEMPTING THIS ASSIGNMENT

The purpose of this essay is to analyze the average life, average age, and asset turnover ratios, calculate the accounts receivable turnover ratio and convert that ratio into days, and examine the significance of the ratios in relation to a chosen company. By understanding these ratios, we can gain insight into the financial health and performance of the company.
The article by TI Selling and CP Stickney (1989) provides an informative look into calculating the average life, average age, and asset turnover ratios of a given company. These ratios are fundamental tools in assessing the financial health of a business and the overall efficiency of its operations. The average life of a company’s assets, for instance, can be used to measure the average amount of time that elapses between the acquisition of the asset and its disposal. This provides an excellent indication of the company’s investment cycle, which can then be used to determine the efficiency of asset use and management. The average age of a company’s assets, meanwhile, is a measure of the average length of time that has elapsed since the company acquired its assets. This information can be used to determine whether the company is keeping up with industry trends and technological advancements, as well as whether it is replacing obsolete assets quickly enough. Finally, the asset turnover ratio is a measure of how efficiently a company is using its assets to generate revenue. The higher the ratio, the better the company is at generating revenue from its assets. By calculating these three ratios, a company can get a comprehensive picture of its financial health and efficiency.
The accounts receivable turnover ratio is an important financial indicator for businesses as it gives an indication of how efficiently the business is collecting payments from its customers. A Gill, N Biger, and N Mathur (2010) explain that the ratio is calculated by dividing the net credit sales by the average accounts receivable during the accounting period. This ratio can then be converted into days by dividing 365 by the turnover ratio. This tells the business how many days it takes to collect their receivables. In regards to the chosen company, this ratio can give an indication of how well the company is managing its accounts receivable. A higher ratio indicates that the company is collecting its payments quickly, which is a sign of a healthy business. If the ratio is lower, it can be an indication that the company is not collecting payments in a timely manner which could lead to cash flow problems. Additionally, it can also be used to compare the performance of the chosen company to that of its competitors. Overall, the accounts receivable turnover ratio is an important financial indicator for businesses as it provides insight into how efficiently the company is collecting payments from its customers and how it compares to its competitors.
According to Edmister (1972), analyzing the ratios calculated is an important part of understanding the significance of the ratios in relation to a chosen company. This involves understanding how a company’s financial performance is measured, along with examining how the ratios compare to the industry averages or other similar companies. By doing this, it allows investors to make an informed decision on whether the company is a good investment or not. This analysis is also important in understanding the overall financial health of the company, as certain ratios can be used as a measure of a company’s ability to pay its debts and its capacity to generate profits. For example, the debt to equity ratio is a measure of how much of a company’s capital is funded by debt, compared to how much is funded by equity. Therefore, by examining the ratios calculated for a company, it can provide a more complete picture of the company’s financial performance and its future prospects.
In conclusion, the average life, average age, and asset turnover ratios are a set of important metrics to understand the performance of a company. Each ratio is unique and reveals different insights. For example, the average life ratio tells investors how quickly the company is acquiring and disposing of its possessions. The average age ratio provides information on the number of years it takes for the company to generate a certain level of earnings. Finally, the asset turnover ratio conveys the number of times an of asset is substitued by another within a certain period. Furthermore, the receivable collection period tells the amount of time required to collect accounts receivables from customers. In the context of the chosen company, the understanding of these ratios can help identify potential risks or opportunities and make the most profitable decisions.
Work Cited
RO Edmister.”An empirical test of financial ratio analysis for small business failure prediction.”https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/an-empirical-test-of-financial-ratio-analysis-for-small-business-failure-prediction/5B6446728276923EE0657CA4ADD84F83
“The relationship between working capital management and profitability: Evidence from the United States.”https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=4fbaa2174386ee0cc6e90de5d098b9e36962f2de
“The effects of business environment and strategy on a firm’s rate of return on assets.”https://www.tandfonline.com/doi/pdf/10.2469/faj.v45.n1.43

 

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