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4.20 : Activity Ratios

Activity ratios are financial metrics that assess how efficiently a company utilizes its assets to generate revenue. These ratios help investors and analysts evaluate how well a company is managing its resources, such as inventory, receivables, and fixed assets.

Key activity ratios include:

  1. Inventory Turnover Ratio: This ratio measures how many times a company's inventory is sold and replaced over a period. A higher ratio indicates efficient inventory management.
  2. Receivables Turnover Ratio: This ratio indicates how quickly a company collects cash from its customers. A higher ratio suggests effective credit management.
  3. Asset Turnover Ratio: This ratio shows how efficiently a company uses its total assets to generate sales. A higher ratio reflects better asset utilization.
  4. Accounts Payable Turnover Ratio: This ratio shows how quickly a company pays its suppliers. A lower ratio may indicate that the company is taking full advantage of credit terms.
  5. Fixed Asset Turnover Ratio: This ratio measures how efficiently a company uses its fixed assets (such as property, plant, and equipment) to generate sales. A higher ratio indicates that the company is effectively utilizing its fixed assets.
  6. Working Capital Turnover Ratio: This ratio assesses how efficiently a company uses its working capital (current assets minus current liabilities) to support its sales. A higher ratio suggests that the company is generating more revenue per dollar of working capital.

These ratios are essential for understanding a company's operational efficiency and can signal areas where the company may need to improve its processes to enhance profitability.

Tags

Activity RatiosFinancial MetricsInventory Turnover RatioReceivables Turnover RatioAsset Turnover RatioAccounts Payable Turnover RatioFixed Asset Turnover RatioWorking Capital Turnover RatioOperational EfficiencyProfitability

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