This ratio reveals the efficiency of a business in generating revenues with its available assets; both fixed and current. A higher total asset turnover ratio than one’s historical data or competitor’s data indicates efficient utilisation of assets for creating more sales.
Operating Revenue divided by Average Total Assets = Total Asset Turnover
The average amount of ARBL’s assets is the following.
Total Assets for FY 13 – Rs.1770.5 Crs and Total Assets for FY 14 – 2139.4 Crs. Hence the average assets would be Rs. 1954.95 Crs.
Operating revenue (FY 14) is Rs. 3437 Crs. Hence Total Asset Turnover is:
= 3437 / 1954.95
= 1.75 times
Inventory Turnover Ratio
Inventory is the finished goods kept by a company in their store or showroom for prospective customers. An extra supply of these goods is also typically stored in their warehouse.
If a company is selling popular items, the goods in their stock will be swiftly depleted and need to be replenished frequently. This process is known as ‘Inventory turnover‘.
Assuming a bakery is popular, the baker will likely have an idea of how much bread he has to produce daily. For instance, it could be 200 pounds. As a result, his inventory has to be constantly replenished, and turnover is always high.
It’s clear that not all businesses can be equated to selling bread. Take, for example, a car manufacturer. It doesn’t take a genius to realise that it is far more challenging to get rid of 50 cars than a few loaves of bread!
To offload their entire inventory of 50 cars, the manufacturer will likely have a wait of three months – this means their stock is moved on every 12 weeks, and allowances for four turnovers a year should be noted.
If the product is popular, the Inventory Turnover Ratio will be high. This metric speaks clearly of its success.
In order to calculate the ratio, one can use the following equation:
Cost of Goods Sold divided by Average Inventory = Inventory Turnover
The cost of goods sold is a crucial figure for ARBL; it can be found on their P&L Statement. Incorporating this into our plans will serve us well.
To assess the cost of goods sold, I need to analyse the expenditure of the company.
The cost of materials consumed and stock-in-trade purchased amounts to Rs.2101.19 Crs and Rs.211.36 Crs, respectively, both of which are included in the cost of goods sold (COGS). Accordingly, I would like to review the ‘Other Expenses’ portion of Note 24 to determine if there are any additional costs linked to the COGS.
Manufacturing requires two types of expenses: Stores & spares consumed and Power & Fuel cost, which amount to Rs.44.94 Crs and Rs.92.25Crs, respectively.
Hence the Cost of Goods Sold = Cost of materials consumed + Purchase of stock in trade + Stores & spares consumed + Power & Fuel
= 2101.19 + 211.36 + 44.94 + 92.25
COGS= Rs.2449.74 Crs
For the denominator, we can average the inventory on the balance sheet for FY13 and FY14. The numbers are Rs.292.85 Crs and Rs.335.00 Crs, respectively, resulting in a total of Rs.313.92 Crs.
The Inventory turnover ratio is:
= 2449.74 / 313.92
= 7.8 times
~ 8.0 times a year
This implies that Amara Raja Batteries Limited is able to rotate its stock 8 times a year or once every 1.5 months. To gain an accurate perspective of this measure, it should be compared to what its competition has achieved.
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