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.
