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|
|Cost of sales||407.1||452.9||1,836.5||1,845.8|
|Short term borrowings||–||–||399.6||616.7|
|Long term borrowings||–||–||0.6||0.3|
|*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%|
Table 2 shows the calculations of Total Asset Turnover Ratio.
|Table 2: Total Assets Turnover Ratio Calculation|
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.