Activity ratios
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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
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
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
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
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
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
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
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
- Moghimi R., Anvari A., (2014). An integrated fuzzy MCDM approach, and analysis, to the evaluation of the financial performance of Iranian cement companies, "The International Journal of Advanced Manufacturing Technology", No 71(1-4), p. 570-586.
- Kabajeh, M. A. M., Al Nuaimat, S. M. A., Dahmash, F. N., (2012). The relationship between the ROA, ROE and ROI ratios with Jordanian insurance public companies market share prices. , "International Journal of Humanities and Social Science", No. 2(11), p. 115-120.
- Kazan H., Ozdemir O. (2014). Financial performance assessment of large scale conglomerates via TOPSIS and CRITIC methods, " International Journal of Management and Sustainability", No. 3(4), p. 203 - 224
- Libby, R. (1975). Accounting ratios and the prediction of failure: Some behavioral evidence. Journal of Accounting Research, 150 - 161
- Sauaia A. C. A., (2014). Evaluation of performance in business games: financial and non financial approaches., "Developments in Business Simulation and Experiential Learning: Proceedings of the Annual ABSEL conference", Vol. 28
- Soureshjani M. H., Kimiagari A. M., (2013). Calculating the best cut off point using logistic regression and neural network on credit scoring problem-A case study of a commercial bank., "African Journal of Business Management", No. 7(16), p. 1414-1421
- Šarlija N., Jeger M. (2011). Comparing financial distress prediction models before and during recession., "Croatian Operational Research Review", No. 2(1), p. 133-142.
- Tugas F. C., (2012). A Comparative Analysis of the Financial Ratios of Listed Firms Belonging to the Education Subsector in the Philippines for the Years 2009-2011., "International Journal of Business and Social Science", Vol. 3, No. 21, p. 173 - 190
Footnotes
Author: Justyna Banowska
