Activity Ratios

Activity ratios are a type of financial ratio that measure how efficiently a company uses its assets. They are also known as asset utilization ratios or turnover ratios. Activity ratios are important because they can help investors and analysts understand how well a company is using its assets to generate revenue.

There are many different types of activity ratios, but some of the most common include:

• Inventory turnover ratio: This ratio measures how quickly a company sells its inventory. It is calculated by dividing the cost of goods sold by the average inventory balance. A high inventory turnover ratio indicates that a company is selling its inventory quickly and efficiently.
• Accounts receivable turnover ratio: This ratio measures how quickly a company collects its receivables. It is calculated by dividing net sales by the average accounts receivable balance. A high accounts receivable turnover ratio indicates that a company is collecting its receivables quickly and efficiently.
• Fixed asset turnover ratio: This ratio measures how efficiently a company uses its fixed assets. It is calculated by dividing net sales by the net fixed assets. A high fixed asset turnover ratio indicates that a company is using its fixed assets efficiently to generate revenue.

Activity ratios can be used to compare a company's performance to its peers and to industry averages. They can also be used to track a company's performance over time.

In general, a high activity ratio is considered to be good, as it indicates that a company is using its assets efficiently. However, it is important to note that activity ratios can vary significantly from industry to industry. For example, a company in the retail industry will typically have a higher inventory turnover ratio than a company in the manufacturing industry.

Activity ratios are just one of many tools that investors and analysts use to evaluate a company's financial health. They are important, but they should not be used in isolation. Other factors, such as profitability and debt levels, should also be considered when making investment decisions.