Meaning of Activity Ratio
Accounting ratios include activity ratios. It is a measure of a company's ability to generate revenue and cash through the use of the assets shown on its balance sheet. An asset utilization report shows how well management is utilizing the company's assets to generate the maximum income possible. In order to compare two companies in the same industry, analysts use activity ratios. It can also be used to track the progress of a single company's finances over time.
In This Article
What Type of Activity Ratio?
1)-Working Capital Turnover Ratio
According to this ratio, how well a company uses its working capital is a good indicator of how well the company is doing. Working capital turnover, also known as net sales to working capital, is a metric used to assess the relationship between a company's operating costs and the revenue it generates in order to keep the business going and make money.
2)- Fixed Assets Turnover Ratio
Analysts commonly use the fixed asset turnover ratio (FAT) to gauge a company's operational efficiency. net sales are compared with fixed assets on the balance sheet to see how well a firm can produce sales from its investments in fixed assets, such as property, plant, and equipment (PP&E) (PP&E).
Accumulated depreciation is subtracted from the fixed asset balance to arrive at the net asset value. An increase in a company's fixed asset turnover ratio implies that its investments in fixed assets have yielded a higher return on investment.
3)- Total Assets Turnover Ratio
The asset turnover ratio is a form of efficiency ratio that compares the value of your company's sales revenue to the value of your company's assets. This comparison is made to determine how efficiently your company is operating. It is a very good indicator of how effectively a corporation can make use of its assets to create income. The total asset turnover ratio is often done on an annual basis; however, if necessary, it can be calculated over a shorter or longer duration. In general, the ratio is calculated on an annual basis.
4)- Inventory Turnover Ratio
The inventory turnover ratio measures how often a company's inventory is sold and replaced over the course of a specific time period. The inventory turnover formula and the number of days in the period can then be used to calculate the number of days it takes to sell the inventory on hand.
A greater understanding of inventory turnover can aid companies in making more informed decisions about pricing, production, marketing, and inventory purchases.
Slow turnover ratios are often accompanied with low sales and even overstocking of products. In addition, a greater ratio shows that sales have increased or that there is a shortage of stock. Those in the retail and grocery businesses have the highest turnover of inventory.
5)- Days On Sales Inventory
A company's days' sales in inventory (DSI) is a measure of how long it typically takes to turn its inventory into revenue. The less days of sales in inventory suggest that a company is better at selling its goods, while a greater number indicates that it may have invested too much in inventory and may have outdated inventory on hand. A huge amount, on the other hand, could suggest that management has decided to retain high levels of inventory in order to achieve high rates of order fulfilment...
6)- Account Receivable Turnover Ratio
As a financial accounting statistic, the accounts receivable turnover ratio evaluates how well a company is able to recover its receivables. How successfully a company handles and uses the money it lends to customers, as well as how quickly that money is recovered or paid back, is assessed by this ratio The accounts receivable turnover ratio of an efficient company is higher than that of an inefficient one. Using this indicator, businesses in a similar industry can be compared to see how they stack up against their peers.
7)- Days Sales Outstanding Ratio
This indicator, Days Sales Outstanding (DSO), measures a company's ability to collect money from customers who have paid on credit. On an annual basis, DSO measures the average number of days it takes for a corporation to collect cash payments from clients who paid using credit.
8)- Payable Turnover Ratio
Using the accounts payable turnover ratio, a company can determine how quickly it pays off its suppliers' bills. How often a corporation pays off its debts is determined by its accounts payable turnover.
A company's short-term debt to suppliers and creditors is known as accounts payable. Company efficiency in paying suppliers and short-term obligations is shown by the accounts payable turnover ratio.
9)- Days’ payable Outstanding
In order to determine if a firm's payment policy is aggressive or conservative, the amount of time it takes the company to pay off its creditors is measured in terms of days payable outstanding.
Summary of Activity Ratios
● Comparisons between businesses in the same industry can be made using activity ratios.
● The right activity ratios can be used to identify problems and to correct the business's functioning as needed.
● Facilitates decision-making by delivering financial data in an easily digestible way.
● Since activity ratios are based on data and are accurate, investors can trust their information.
● Financial metrics that help investors and analysts understand how well a firm utilises its assets to create revenue and cash are referred to as activity ratios.