Definition:

Activity ratios are financial ratios that measure how efficiently a company uses its assets to generate sales. They provide insights into a company’s operational efficiency and its ability to convert assets into sales.

Common activity ratios include:

  • Inventory turnover ratio: Measures how efficiently a company manages its inventory.
  • Accounts receivable turnover ratio: Measures how efficiently a company collects payments from customers.
  • Accounts payable turnover ratio: Measures how efficiently a company pays its suppliers.
  • Asset turnover ratio: Measures how efficiently a company uses its assets to generate sales.

Why are activity ratios important?

  • Efficiency evaluation: Activity ratios help evaluate a company’s operational efficiency.
  • Cash flow management: A high inventory turnover ratio and a high accounts receivable turnover ratio can improve a company’s cash flow.
  • Financial analysis: Activity ratios are used in financial analysis to assess a company’s overall financial health.

In essence, activity ratios provide valuable insights into a company’s operational efficiency and its ability to generate sales from its assets.