Financial Ratios Comparison

1906 Words Mar 26th, 2011 8 Pages
The companies’ financial ratios can be compared with the ratios of other equivalent companies between business sectors at one point of time. These comparisons provide explanations on the relative financial status and performance of the company compared to the relative performance of its competitors. Comparisons are usually made with other companies in the same business sector and the benchmark is assumed to be the suitable value for a company. The assumption here is for the companies in the same business sector to have the almost identical financial ratios. If the ratio of a company shows a significant difference with the standard ratio, then further investigation must be done to find the cause of that difference. For evaluation, a …show more content…
Assuming there are 360 days in a year. The comparison between the average periods with the company’s credit term could measure the efficiency of the company in collecting debts from its customers.
2.8.3 Inventory Turnover
Inventory turnover measures the efficiency of inventory management. It shows the number of times the inventory can be sold in a year. The higher the inventory turnover, the better, as it is an indication that the company is able to sell its inventory quickly and reduce the chances of obsolete inventory.
Inventory turnover is obtained by dividing the cost of goods sold with inventory. The calculation of inventory turnover for Company ABC is shown as follows

2.8.4 Average Inventory Sales Period
The average inventory sales period shows the number of days taken to make one round of inventory sales. A high average inventory sales period is less satisfactory as this indicates that the company takes a longer time to sell its inventory.
For Company ABC, the average inventory sales period is 50 days as calculated below:
2.8.5 Fixed Asset Turnover
Fixed asset turnover shows the efficiency of the company in using its fixed assets to generate sales. The higher the ratio, the better it is because it indicates efficient asset management.
This ratio is obtained when the sales is divided by the net fixed assets. The calculation of fixed asset turnover for Company ABC is as follows:
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