Analysis of the Operation and Financial Condition of the Enterprise

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Analysis of the Operation and Financial Condition of the EnterpriseLong-term investmentturnover ratio =Net turnoverLong-term investments(4.16.)A common feature of all long-term investments is such that these investmentshave been made in cash.Low long-term investment turnover ratio means that there is too much capitalinvested in long-term investments or that too much assets are invested compared to theamount and sales of goods produced. Therefore, in order to increase this level, it would benecessary to sell a share of fixed assets or else to lease it out thus gaining income thatcould be used more efficiently, for example, for payment of debts or expansion ofbusiness, or for another purpose.Total asset turnover ratio demonstrates, how efficient is the use of assets forbuilding up of the net turnover, i.e., what is the number of full turnover cycles, whichcreates a sufficient effect in the form of profit or how many currency units were returnedper each asset currency unit invested in assets. This is estimated by dividing the netturnover with the total amount of assets:Total asset turnover ratio=Net turnoverTotal assets(4.17.)If this measure is too low, it would mean that the investment has been tooexcessive or that the scope of production has been reduced, or that the turnover hasdeclined.In order to increase this variable an enterprise would be recommended to disposeof a part of its fixed assets as well as a part of its production stock in order to use the assetsacquired for repayment of its short-term liabilities. In order to increase the turnover ofassets in an enterprise customers are offered rebates (discounts) in exchange for reducedpayment terms. For example, if the payment term of 30 days is agreed in the contract,however, should the customer pay in 10 days time, it would receive this discount. This waya faster inflow of cash in an enterprise is promoted.Due to the fact that the amount of total assets agrees with the amount of capital,the asset turnover ratio may be as well called capital turnover ratio. This measure issignificant for enterprise owners. It is calculated the same way, by using capital instead ofassets:Capital turnover ratio =Net turnoverCapital(4.18.)78
Analysis of the Operation and Financial Condition of the EnterpriseFrom the point of view of capital turnover the same ratio describes also, howefficient is the use of capital for building up of its net turnover and shows the amount ofrevenue earned per one lat invested.The debtors’ turnover ratio shows, how many times on average during the yearthe amount of accounts receivable have been converted into cash. This ratio is calculatedby dividing the value of goods sold (turnover) by the average amount of accountsreceivable:Accounts receivable turnover ratio =Net turnoverAverage amount of accountsreceivable(4.19.)Accounts receivable are the enterprise’s outstanding invoices for the goods sold.Accounts receivable are short-term debts with the repayment period less than a year.There is no base for comparison for this ratio except the average industry figures.It is recommendable to compare it with the creditors’ turnover ratio by thus identifying,what terms are applied in an enterprise for debtors and what are the terms offered by thecreditors.This ratio may be also expressed in days in order to arrive at the number of daysnecessary for conversion of the amount of accounts receivable into cash.The debtors’ turnover period is estimated by dividing the number of days in ayear by the debtors’ turnover ratio as follows:Accounts receivableturnover =period (in days)Number of days in a yearAccounts receivable turnover ratio(4.20.)Accounts payable are also included in the scope of turnover ratios, although thisitem is not viewed as a component part of current assets, but rather a source of financing.The accounts payable turnover ratio defines, how many times of accountspayable turnover is necessary for an enterprise to pay for its short-term liabilities or to payfor its invoices.This ratio is estimated by dividing the cost of goods sold by the average annualamount of accounts payable (debts):Accounts payableturnover ratio =Cost of goods soldAverage amount of accountspayable(4.21.)Just like the debtors’ payment period may be calculated in days the same can bealso done for the turnover of accounts payable by comparing the two later on.79
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Analysis of the Operation and Financial Condition of the Enterprise

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