Activity ratios

Activity ratios
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Activity ratios
Primary topic
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Methods and techniques

Activity ratios present how fast assets of the company can be converted to cash. It is especially important for manufacturing companies, which use many raw materials, inventory, etc. The activity ratios can help determine how well managers do they job in their optimization. Comparison between competitors shows which of the companies is more efficient.

Types of activity ratios[edit]

There are several activity ratios. Among them the most important are [1]:

  • Accounts receivable turnovern ratio - ability to collect money from customers
  • Accounts payable turnover ratio - it informs how many times the liabilities are repaid.
  • Fixed assets turnover ratio - examines the effectiveness of management in the company in terms of investments in fixed assets
  • Total assets turnover ratio - efficiency of using assets to make sales
  • Return on investment (ROI) ratio - informs about the efficiency of managing all of a firm's assets
  • Inventory turnover ratio - how often inventory balance is sold during an accounting period

Accounts receivable turnover ratio[edit]

Accounts receivable turnover ratio informs how many times in a given period the state of the company's receivables has been renewed [2].
The formula is:
Accounts receivable turnover = Net sales / Average accounts receivable

Acounuts payable turnover ratio[edit]

Accounts payable turnover rato informs how many times the level of liabilities is repaid on average over a given period [3].
The formula is:
Accounts payable turnover = Cost of sales / Average accounts payable

Fixed assets turnover ratio[edit]

Fixed assets turnover ratio examines the effectiveness of management in the company in terms of investments in fixed assets. Usually calculated in the annual pile. The formula is[4]:
Fixed Assets Turnover Rate: Net Sales / Fixed Assets

Total assets turnover ratio[edit]

Total assets turnover ratio - informs about sales effectiveness using all resources.
The formula is:
Assets Turnover Rate = Net Sales / Total Assets

Return on investment (ROI) ratio[edit]

Return on investment ratio is draws attention to capital management in the enterprise. It informs about the effectiveness of the company's operation to generate profits from capital invested by shareholders [5].
The formula is:
Return on investment (ROI)= Net profit after taxes/Total paid in capital

Inventory turnover ratio[edit]

Inventory turnover ratio measures how many times a stock has to be returned in a given period.The shorter the time from the purchase of the stock to its sales, it is a higher inventory turnover ratio. Conversely, if a company needs more time to sell stocks, the smaller the indicator will be [6].
The formula is:
Inventory Turnover ratio = Costs of Goods Sold / Average Inventory

References[edit]

Footnotes[edit]

  1. Moghimi, R., Anvari, A., 2014, p. 571
  2. Tugas F. C., 2012, p. 175
  3. Tugas F. C., 2012, p. 174
  4. Kazan H., Ozdemir O., 2014, p. 211
  5. Kabajeh M. A. M., Al Nuaimat, S. M. A., Dahmash, F. N., 2012, p. 116
  6. Moghimi, R., Anvari A., 2014, p. 571

Author: Justyna Banowska