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ratio may mean that you are too strict on granting credit to your customers which may ultimately lead to lost
sales.
The Inventory Turnover ratio shows the relation to inventory and cost of sales. A high ratio indicates that a
lot of inventory can be sold without keeping very much inventory on hand. This means that you are
efficient in managing your inventory, whereas a low ratio may mean that you hold a lot of obsolete items in
stock or manage your inventory poorly.
The Long Term Asset Turnover ratio indicates how effective a company is in managing its long term assets
in relation to sales. All things being equal, a higher ratio means more efficient use.
Total Asset Turnover compares all assets in comparison to sales. It takes into consideration current assets
as well as fixed assets. A higher ratio is seen as more efficient management of assets.
Debt Management
Debt management ratios focus on the ability to manage debt
Debt to Asset ratio measures the ability to use creditors to finance the assets of your company. A larger
ratio shows that you are making more use of creditors to finance your business. Of course a very high ratio
is not good or it could cause insolvency.
Debt to Equity ratio measures the amount of debt in comparison to the amount of equity held by a company.
A higher ratio means that your creditors are financing more of the business than the owner’s which can
cause insolvency.
Long-Term Debt to Equity ratio measures the same as the Debt to Equity ratio except that it only takes into
account Long Term debt. This separates out current liabilities and its effect on the Debt to Equity ratio.
Note:
One ratio taken in isolation does not tell the picture of a company. You must take many ratios into
consideration when evaluating the performance of your company.
Chapter 7 – General Ledger
Page 151