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CHAPTER 12: OPERATING RATIOS – EFFICIENCY OF THE BUSINESS

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OPERATING RATIOS – EFFICIENCY OF THE BUSINESS
Total Assets Turnover
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CHAPTER 12: OPERATING RATIOS – EFFICIENCY OF THE BUSINESS

This category of ratios measures how efficiently the business is being run in terms of operations. In this book we will focus only on a few of the operating ratios we think would be useful, which are Total Assets Turnover, Days Sales Outstanding, Days Payables Outstanding, Days of Inventories, and Cash Conversion Cycle.

We will use the figures in Table 1 as the base for our subsequent calculations.

 Table 1: Selected Financial Data Extracted from 2015 & 2016 Annual Reports (in RM million) Apex Pharmaniaga 2015 2016 2015 2016 Income Statement Revenue/Sales 526.9 581.3 2,189.3 2,189.0 Cost of sales 407.1 452.9 1,836.5 1,845.8 Net Profit 34.2 35.0 84.0 45.6 Balance Sheet Opening inventories* 51.7 60.9 427.0 539.9 Closing Inventories 60.9 65.8 539.9 532.2 Trade Receivables 123.1** 132.9** 147.7 161.3 Total Assets 390.2 418.4 1,495.6 1,683.1 Trade Payables 74.4*** 80.1*** 435.9 378.1 Short term borrowings – – 399.6 616.7 Long term borrowings – – 0.6 0.3 Shareholders’ fund 288.7 312.4 560.0 559.4 *Opening inventories are the closing inventories in the previous financial year. **Page 121 of Apex’s 2016 annual report, under notes to the accounts 20. Trade and Other Receivables  ***Page 127 of Apex’s 2016 annual report, under notes to the accounts 25. Trade and Other Payables.

Total Assets Turnover

One of the key operating ratios is Total Assets Turnover, which measures how much sales are generated by each dollar of asset that the company utilises. The formula is:

 Total Assets Turnover = Revenue X 100% Total Assets

Table 2 shows the calculations of Total Asset Turnover Ratio.

 Table 2: Total Assets Turnover Ratio Calculation Formula = Sales X 100% Total Assets Apex = 581.3 X 100% 418.4 = 138.9% Pharmaniaga = 2,189.0 X 100% 1,683.1 = 130.1%

What this ratio means is that for every RM1.00 worth of assets, Apex generates RM1.39 worth of sales whereas Pharmaniaga generates RM1.30 worth of sales. Both are quite on par in this measure. In normal cases, we would expect companies to generate at least RM1.00 worth of sales from each RM1.00 worth of assets. Both Apex and Pharmaniaga’s asset efficiency can be attributed to the fact that both companies are also engaged in trading and distribution businesses, which requires fewer assets and generates higher sales volume.

Next week, we will look at Cash Conversion Cycle and its components.