Activity ratios, also known as efficiency ratios, are financial metrics that assess how well a company manages its assets and liabilities in relation to its operations. These ratios provide insights into the efficiency and effectiveness of various aspects of a company’s operations, including how quickly it collects cash from customers, manages inventory, and utilizes its assets. Activity ratios are important for analyzing the operational performance and financial health of a business.

Here are some common activity ratios:

1. **Accounts Receivable Turnover Ratio:**

– **Formula:** \( \text{Accounts Receivable Turnover} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}} \)

– This ratio measures how efficiently a company is managing its receivables. A higher turnover indicates that the company is collecting payments from customers more quickly.

2. **Inventory Turnover Ratio:**

– **Formula:** \( \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} \)

– This ratio assesses how efficiently a company manages its inventory. A higher turnover indicates that the company is selling and restocking its inventory more frequently.

3. **Asset Turnover Ratio:**

– **Formula:** \( \text{Asset Turnover} = \frac{\text{Net Sales}}{\text{Average Total Assets}} \)

– This ratio measures how efficiently a company utilizes its assets to generate sales. A higher ratio suggests better asset utilization.

4. **Accounts Payable Turnover Ratio:**

– **Formula:** \( \text{Accounts Payable Turnover} = \frac{\text{Total Purchases}}{\text{Average Accounts Payable}} \)

– This ratio evaluates how efficiently a company manages its payments to suppliers. A higher turnover indicates that the company is paying its suppliers more quickly.

5. **Total Asset Turnover Ratio:**

– **Formula:** \( \text{Total Asset Turnover} = \frac{\text{Net Sales}}{\text{Average Total Assets}} \)

– This ratio assesses the overall efficiency of a company in using its assets to generate sales.

6. **Fixed Asset Turnover Ratio:**

– **Formula:** \( \text{Fixed Asset Turnover} = \frac{\text{Net Sales}}{\text{Average Net Fixed Assets}} \)

– This ratio specifically focuses on how efficiently a company utilizes its fixed assets (property, plant, and equipment) to generate sales.

7. **Cash Conversion Cycle:**

– **Formula:** \( \text{Cash Conversion Cycle} = \text{Days Sales Outstanding (DSO)} + \text{Days Inventory Outstanding (DIO)} – \text{Days Payable Outstanding (DPO)} \)

– This cycle measures the time it takes for a company to convert its investment in inventory and other resources into cash inflows from sales.

These ratios provide valuable insights into different aspects of a company’s operations and financial management. Investors and analysts use activity ratios to evaluate operational efficiency, liquidity, and the overall financial health of a company. It’s important to note that the interpretation of these ratios can vary by industry, and it’s often useful to compare a company’s ratios with those of its peers or industry benchmarks for a more meaningful analysis.