Q:

What is asset utilization?

A:

Quick Answer

Asset utilization is a ratio used by business analysts to determine how well a company is using its available assets to generate a profit. Asset-utilization ratios are used to determine the profitability of everything from inventory to accounts receivable, sales and total asset turnover.

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Full Answer

The higher the utilization ratio of any given asset, the more profit it makes a company. With accounts receivable, it is helpful to know the accounts receivable turnover, or number of times per year that accounts receivables is collected. From here, an analyst can determine the average collection period for the company.

A simple ratio for determining turnover divides the net credit sales by the average accounts receivable. This equals the accounts receivable turnover. To determine the average collection period for accounts receivable, the analyst can divide the number of days in a year, 365, by the accounts receivable turnover. To determine the company's operating cycle, the amount of days it takes for inventory and receivables to generate cash, the analyst adds together two different asset ratios, average collection period and average age of inventory. When figuring the asset ratio for average age of inventory, the analyst must first determine inventory turnover by dividing the cost of goods sold by the average amount of money invested in inventory. To figure age of inventory, the analyst divides 365 days by the inventory turnover.

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