I was trying to find out a ratio which could give me some insight into the way a company is utilising its assets.I figured out and came across this ratio. This ratio is Sales/Capital Employed.It appears a very simple ratio, but it exposes a lot on the the way a company is utilising its asets.
Before pressing ahead, I would like to make some assumptions:
1.Attention must be made to the industry type.
2.One Year's ratio must not be only looked at. Rather the slope is important with the ratio values on the y-axis and time on the x-axis.
I beleive this ratio must be high as possible among the best players in a particular industry.Which in turn implies that either the turnover must be very high, or Capital Employed must be less.Low capital employed, throws some important points:
a. It shows the company has a tendency of paying good dividends(Dividend Policy). You cant have a low capital employed until and unless you return back the capital.
b. It throws a light on the solvency. Low Capital Employed, implies that there will generally be very negligible debt on the balance sheet. Therefore, it throws light on the Solvency of the company.
c.It will also show, what magic good business conditions can do.Because the capital employed will be less,chances are the assets which the company must be using must be nearly fully depreciated.Which means, there will be negligible depreciation to be borne by the company for increased production.Because of low fixed cost, you will have greater manuouverability.
Actually, this ratio wont be very high in most of the cases. You are unlikely to see a company with a double digit ratio yet, the figures may be distinctive enough to distinguish between very good, good and not-so-good companies.
Regards,
Vivek
Edited by basant - 07/Jun/2008 at 6:41pm
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