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Assets represent any item a company owns and uses for a long period of time in business operations. Total assets are all these added together in real dollars as reported by the company’s accounting reports. Different ways to measure total assets include the balance sheet, total asset turnover ratio, working capital ratio, and debt-to-asset ratio. The latter two ratios split a company’s assets into two groups: short term and long term. Measuring assets is important as companies need information for making decisions and reporting financial figures to stakeholders.
The balance sheet is a standard accounting report companies prepare each month. The first section — either on the left or top of the statement — includes a company’s total assets. All assets on the balance sheet have dollar amounts that represent the historical cost for each asset type. Accountants record an asset’s historical cost each time a company makes a purchase. Current assets last less than 12 months, while long-term assets last more than 12 months.
The financial measurement that determines how well a company uses its assets to incur sales is the total asset turnover ratio. Accountants divide net sales by total assets to determine this figure. A higher total asset ratio indicates the company is extremely efficient in the use of its assets. The company can compute this turnover ratio on a monthly or annual basis. A historical trend allows a company to determine if its use of total assets is getting better or worse over time.
The working capital ratio does not necessarily measure total assets. Instead, it focuses only on a company’s current assets and liabilities. The ratio is current assets less current liabilities. A higher number is preferable as it indicates a company has more current assets to help run its business operations. Current liabilities represent short-term loans a company often uses to purchase current assets, making it an important figure to use here.
The debt-to-asset ratio measures a company’s long-term assets. This metric includes a company’s total assets and liabilities. It is similar to the working capital ratio, save for the fact it includes the long-term assets a company reports on its balance sheet. The formula for the debt-to-asset ratio is total liabilities divided by total assets; figures below 1.0 indicate a company uses equity financing rather than debt financing. Companies with high debt loads are often over leveraged, making the company a risky investment.
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