Asset Utilization: Efficiency in Managing Its Assets to Generate Sales

Pages: 2 (450 words) Published: October 11, 2010
Asset Utilization measures a company’s efficiency in managing its assets to generate sales. Receivable Turnover Ratio tells how quickly Target customers are paying. A high turnover ratio is generally a good thing since it means that customers are paying their bills. It also shows that the Target is very responsive in its credit and collection policies and extending credit to enough customers. Average collection period measures the timeframe of which Target customers are paying their debt. The lower this number is the better because it means payments are being made faster. Applying the effects of the economy, the fluctuation in the receivable turnover ratio over time can indicate that customers have less disposable income and are still inclined to charge purchases instead of paying with cash, and an average 48 day collection period on a 30 day term mean customers are falling to pay timely. Liquidity

RatioFormula for CalculationRatio
Current Ratiocurrent assets / current liabilities1. Quick Ratio(current assets - Inventory) / Current Liabilities0.991.031.030.76 Inventory TurnoverCOGS / average inventory6.356.796.436.52 Days of Inventory on Hand365 / Inventory Turnover57.4853.7656.7755.98

A liquidity ratio determines how much cash or available funds the company can use within a financial period. It shows the company’s ability to meet its short-term financial obligations. Current Ratio is the most popular financial ratio used to test company liquidity by providing the number of times current assets can cover current liabilities. Here it shows that for every dollar in current liabilities, on average Target has roughly $1.60 in current assets. Quick Ratio is similar to the current ratio, as it measures the amount of the most liquid current assets there are to cover current liabilities. A general rule of thumb states that the ratio should be 1 to 1. Here Target has been able to closely maintain a 1 to 1...
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