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.