Ratios that measure how efficiently a firm employs its assets to generate sales are known as _____________blank ratios. Multiple Choice profitability market value short-term solvency long-term solvency utilization
The Correct Answer and Explanation is:
The correct answer is utilization ratios.
Utilization ratios measure how effectively a firm uses its assets to generate revenue or sales. These ratios are key to understanding the efficiency of asset management within a company. They show how well a firm employs its assets to produce income, indicating whether the company is maximizing the use of its resources to generate sales.
Some common utilization ratios include:
- Asset Turnover Ratio: This ratio measures the amount of sales generated for every dollar of assets. A high asset turnover ratio indicates that the company is using its assets efficiently, whereas a low ratio suggests that the company may be underutilizing its assets.
- Inventory Turnover Ratio: This ratio shows how often a company’s inventory is sold and replaced over a period. A higher inventory turnover rate indicates that a company is selling products quickly and efficiently using its inventory.
- Receivables Turnover Ratio: This ratio measures how quickly a company collects its accounts receivable. A higher turnover rate is generally favorable as it indicates the company is efficient at converting its receivables into cash.
- Fixed Asset Turnover Ratio: This ratio indicates how well a company uses its fixed assets (like property, plant, and equipment) to generate sales. It reflects the efficiency of capital investment in long-term assets.
In summary, utilization ratios help evaluate how well a company uses its assets to generate revenue and sales. High values in these ratios generally signify efficient asset management, while low values could suggest the opposite. They are essential for investors and analysts to assess operational efficiency.
