Answer the following questions: a. If one firm is growing rapidly and another is not, how might its inventory turnover ratios differ? Which company may have a higher turnover ratio? Why? b. How might the different ages of firms distort comparisons of their fixed assets turnover ratios? c. Why would the inventory turnover ratio be more important for someone analyzing a grocery store chain than an insurance company? d. If I want to start a business, which is better, having a high or low fixed asset turnover ratio? Discuss your answer

Answer A. ITR of the firms can differ. ITR tells that how rapidly or frequently inventory is converted into sales. Higher the ratio better it is. ITR of growing company will be more as compared to other company because growth of the company depends upon its profits and profits depends upon the sale. So the company whose inventory is rapidly or increasingly converted into cash can be termed as  growth company.

Answer B. We can't compare the two companies of different ages on the basis of Fixed assets turnover ratio. Formula of FATR is Net sales divided by Net fixed assets. Higher the ratio better it is. This ratio can be improved by increasing sales or by decreasing or selling assets. So the company which is of high age can have more FATR. Reason can be depreciation charged on fixed assets. This company have already charged more depreciation because of its high age. By charging more depreciation, value of its net fixed assets have been reduced and due to this its FATR will be high. Second reason can be its more sale due to more experience. And in case of other companies whose life is less will have more fixed assets which they purchased during inflation so its FATR will be low due to high denominator.

Answer C. ITR is more important in case of Grocery chain store. Reason being grocery stores deal with the day to day items which are of routine nature. Managers must be awared about the ITR because they have to replenish their stocks accordingly. If stock is not replenished at proper time then customers will go without purchases and goodwill of the business will go down. So it is the most important ratio which helps in maintaining liquidity in the business. It tells managers within how many days stock will be converted into sales and how to place further orders for the replenishment.

Answer D. If I have to start a business then I will prefer the business having high fixed Asset turnover ratio. Because a high FATR often indicates that a firm effectively and efficiently uses its fixed assets to generate revenues. A low FATR generally indicates the opposite: means a firm does not use its fixed assets effectively or to its full potential to generate revenue. Fixed assets required huge investments. More than 50% of capital employed is used in purchasing fixed assets. So it is the duty of the managers to make efficient use of fixed assets. And FATR indicates the same.