Disadvantages of Artificial Intelligence in Commercial Banking
In the previous articles, we have already seen what artificial intelligence is and how it can be applied in commercial banking. We are also aware of the various advantages of artificial intelligence. These various advantages are the main reason that artificial intelligence is being adopted by commercial banks all over the world at a breakneck […]
Interbank Market – Meaning, Importance and its Functions
The banking system is the bedrock upon which the modern financial system stands. The banking system is highly integrated with the entire economy. Retail borrowers, small and medium enterprises, large companies as well as governments are all involved in borrowing money from banks at regular intervals. It is for this reason that the well-being of […]
Important Decisions Influenced by Cost Modeling
In the previous article, we studied the cost modeling process. We understood the various steps which have to be undertaken in order to model costs. However, we also need to understand that cost modeling is an iterative process. This means that a company creates a cost model, runs the numbers, compares those numbers with their […]
Estimating Project Cash Flows: Part 3
Continuing from the previous two articles, we will look at some more counterintuitive steps that need to be taken to calculate the cash flows which should then be discounted to arrive at the worth of the project. This article will cover the concepts of how sunk costs should be treated as well as how allocated […]
The Deepening Insolvency Theory
Timing is everything when it comes to bankruptcy claims. Any company facing the threat of bankruptcy has a duty to ensure that it maximizes the enterprise value. This means that the company, its lenders, and its managing officers have an inherent duty to ensure that one particular group of stakeholders is not benefitting at the […]
Fixed assets i.e. property, plant and equipment represent the single largest investment any company makes in its operations. It is therefore important that a company keeps a close eye on whether these investments are performing well and generating adequate revenue and profit to justify the expenditure. While it is impossible to come up with a single number that explains the efficiency of the company in utilizing its fixed assets, the fixed asset turnover ratio comes close. Here are the details of this ratio.
Fixed Asset Turnover Ratio = Sales Revenue / Total Fixed Assets (Average of the two balance sheets)
The fixed asset turnover ratio is best applied when there is adequate context. Dividing the two numbers and getting a third number makes little sense unless you can compare it with something.
The best comparison in with the company’s past records itself. If the company has made a new addition to the fixed assets, one can find out the new fixed asset turnover ratio and compare it with the old fixed asset turnover ratio and see if there have been any substantial improvements as a result of the addition. Efforts must be made to ensure that extraneous variables like general condition of the economy et al are nullified to get a true picture of the state of affairs.
Another popular comparison is to benchmark the fixed asset turnover ratio of a company with those of other companies in the same industry. Same industry is important because different industries have different fixed capital requirements.
Service oriented companies usually have less fixed capital requirement as compared to heavy manufacturing. Some companies use an average of the other companies in the industry to benchmark their performance against whereas others look at the best in the field and try to compete with them.
The fixed asset turnover ratio provides the best estimate of the operating leverage of the firm. If increases in fixed assets lead to disproportionate increases in sales, then the firm has a high operating leverage. In some ways therefore, a wildly fluctuating fixed asset turnover ratio is a measure of high risk that a company is facing.
Also investors should be wary of changes in the revenue policy. Changes in the revenue policy can affect sales which can make this ratio artificially higher or lower thereby distorting the investors perception of the efficiency of the company.
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