Activity Ratios

Activity ratios are those ratios which are used to assess the efficiency with which company is managing the assets. Activity ratios are particularly useful for manufacturing company. They are also called turnover ratios because they measure the efficiency of the company in terms of sales or turnover. Given below are the various activity ratios which are used to judge the efficiency of the company –

1. Sales Turnover Ratio = It is calculated using the formula – Sales/Total assets .A Sales Turnover ratio indicates how much business a company generates for every additional amount invested. Higher the ratio better it is, as it implies that company is generating more sales with given assets.

2. Account Receivables Turnover Ratio = It is calculated using the formula – Annual credit sales/Accounts receivable. It is an indication of how quickly the company is collecting the money from its debtors. Higher ratio signifies that company can convert its credit sales quickly into cash while a lower ratio may put company into trouble if it is not able to generate cash from other activities of the business.

3. Inventory Turnover Ratio = It is calculated using the formula – Cost of goods sold/Average stock (opening stock +closing stock/2). It indicates how quickly company is selling the goods which are lying at warehouse. Since there is a time gap between manufacturing the goods and selling them, this ratio judges the efficiency of the company in that respect.

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