Activity Ratio Meaning, Formula, Types and Calculation

The Debtor Turnover Ratio is a key indicator of a company’s ability to extend credit to customers while efficiently recovering due amounts within the stipulated payment period. Also known as the accounts receivable turnover ratio, it reflects the company’s credit management performance. Like other financial ratios, activity ratios provide meaningful insights compared to industry averages or the firm’s historical data. They bring little value when examined individually but, combined, offer a comprehensive insight into operating efficiency.

How to Calculate Activity Ratio?

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• It is a good sign when the accounts receivables turnover ratio is higher since the debts are paid on time instead of written off.
• This ratio, among other activity ratios, could be beneficial in rating a company on a negative or positive spectrum while investing in its stock or investing in mutual funds that have specific company stock.
• Conversely, a lower ratio might imply challenges in settling credit obligations promptly.
• These ratios highlight the efficiency of asset management by indicating how well a company converts its investments into cash and profits.
• Activity ratios are like efficiency gauges for businesses, showing how well they use resources to make the most revenue.
• A high turnover ratio suggests that management is maximising the use of a company’s short-term assets and liabilities to drive sales.

Investment Turnover Ratio / Net Asset Turnover Ratio:

It also shows the way in which revenue is generated in a company and the way in which the elements of the balance sheet are utilised for managing the business. It shows the number of times the account payables are cleared by the company in an accounting period. A high ratio indicates that a company is using its total assets very efficiently or that it does not own many assets, to begin with. A low ratio indicates that too much capital is tied up in assets and that assets are not being used efficiently to generate revenue. The inventory turnover ratio details the efficiency with which inventory is managed.

Creditors or accounts payable ratio

11 Financial’s website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. The capacity ratio is also known as the actual usage of budgeted capacity ratio. It types of activity ratios shows the relationship between the actual number of working hours and the budgeted number of working hours.

Example 3: Comparing Industry Norms

• Company B has an Inventory Turnover Ratio of 2, meaning it sells and replenishes its inventory only twice a year.
• A high ratio means that the management of the company is making efficient use of its existing assets, probably to reinvest them in company operations for the betterment of the business.
• Also known as turnover ratios, they provide insights into the operational efficiency and effectiveness of a business in utilizing its resources to generate sales and cash flow.
• Inventory turnover ratio is the number of times a company’s inventory is sold during a certain period.
• High activity ratios, such as inventory turnover, accounts receivable turnover, or asset turnover, suggest strong operational efficiency and the productive use of resources.
• This ratio helps evaluate the effectiveness of a company in collecting its accounts receivable.

Higher calculations suggest that a company can move its inventory with relative ease. Activity Ratios or Assets Management Ratio depicts how a company utilizes its assets to generate revenue. In simple words, the activity ratio denotes the ratio between the invested amount in the particular asset type and the revenue generated by such asset in the activity ratio example.

Activity Ratios: Know How Your Business Performs

The higher the payables turnover, the more quickly the company pays its suppliers and creditors. It is believed that such responses may be independent and develop more of a certain type of marker to the detriment of another 16, 43, 44. The primary findings of this systematic review indicate that the physical activity group did not differ from the control group in terms of oxidative stress markers. Notwithstanding, the physical activity intervention group demonstrated the capacity to elevate the levels of antioxidant markers. Cancer patients who participated in physical activity programs may have exhibited an increased concentration of antioxidants. Working Capital Turnover Ratio is another important turnover ratio that helps the business to determine the utilization efficiency of the working capital of a business.

Total asset turnover is a measure of how efficiently a company is using its total assets. The accounts receivable turnover ratio determines an entity’s ability to collect money from its customers. Total credit sales are divided by the average accounts receivable balance for a specific period. Activity ratios measure a firm’s ability to leverage its assets to generate revenue. As a valuable tool for measuring how efficiently a company manages various balance sheet items, these multiples indicate how quickly capital and assets are converted into cash or sales. Furthermore, there are already two new articles that can be incorporated on the topic 24, 25.

It measures how many times a business can turn its accounts receivables into cash. Liquidity ratios assess a company’s ability to meet its short-term obligations, focusing on its liquidity and ability to convert assets into cash. On the other hand, activity ratios evaluate how efficiently a company utilizes its assets to generate sales or revenue. While liquidity ratios emphasize solvency, activity ratios focus on operational efficiency and asset management. The accounts receivables turnover ratio depicts how good a business is at giving credit to its customers and collecting debts.