# Activity Ratios

## What are 'Activity Ratios'

Activity ratios measure a firm's ability to convert different accounts within its balance sheets into cash or sales. Activity ratios measure the relative efficiency of a firm based on its use of its assets, leverage or other such balance sheet items and are important in determining whether a company's management is doing a good enough job of generating revenues and cash from its resources.

Next Up

## BREAKING DOWN 'Activity Ratios'

Companies typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues, so analysts perform fundamental analysis by using common ratios such as the total assets turnover ratio and inventory turnover.

Activity ratios measure the amount of resources invested in a company's collection and inventory management. Because businesses typically operate using materials, inventory and debtors, activity ratios determine how well an organization manages these areas. Activity ratios are one major category in which a ratio may be classified; other ratios may be classified as measurements of liquidity, profitability or leverage.

Activity ratios gauge an organization's operational efficiency and profitability. Activity ratios are most useful when compared to competitor or industry to establish whether an entity's processes are favorable or unfavorable. Activity ratios can form a basis of comparison across multiple reporting periods to determine changes over time.

The following activity ratios may be analyzed as some of an organization's key performance indicators.

## Accounts Receivable Turnover Ratio

The accounts receivable turnover ratio determines an entity's ability to collect money from its customers. Total credit sales are divided by the average accounts receivable balance for a specific period. This activity ratio calculates management's ability to receive cash. A low ratio suggests a deficiency in the collection process.

## Merchandise Inventory Turnover Ratio

The merchandise inventory turnover ratio measures how often the inventory balance is sold during an accounting period. The cost of goods sold is divided by the average inventory for a specific period. Higher calculations indicate inventory is quickly converted into sales and cash. A useful way to use this activity ratio is to compare it to previous periods.

## Total Assets Turnover Ratio

The total assets turnover ratio take a look at how efficiently an entity uses its assets to make a sale. Total sales are divided by total assets to see how proficient a business is at using its assets. Smaller ratios may indicate that the company is holding higher levels of inventory instead of selling.

RELATED TERMS
1. ### Efficiency Ratio

Ratios that are typically used to analyze how well a company ...
2. ### Working Capital Management

A managerial accounting strategy focusing on maintaining efficient ...
3. ### Receivables Turnover Ratio

An accounting measure used to quantify a firm's effectiveness ...
4. ### Current Ratio

The current ratio is a liquidity ratio measuring a company's ...
5. ### Days Sales Of Inventory - DSI

A financial measure of a company's performance that gives investors ...
6. ### Inventory Turnover

Inventory Turnover is a ratio showing how many times a company's ...
Related Articles
1. Investing

### Understanding Activity Ratios

Activity ratios measure how effectively a business uses its assets.
2. Markets

### Dynamic Current Ratio: What It Is And How To Use It

Learn why this ratio may be a good alternative to the current, cash and quick ratios.

### Ratio Analysis

Ratio analysis is the use of quantitative analysis of financial information in a company&rsquo;s financial statements. The analysis is done by comparing line items in a company&rsquo;s financial ...
4. Investing

### AR & Inventory Turnover Is Key For These Sectors

Accounts receivable and inventory turnover are two important ratios in the current asset category. We will also discuss the key industries that benefit from a thorough understanding of these ...
5. Investing

### Efficiency Ratio

There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
6. Markets

7. Markets

### Do Your Investments Have Short-Term Health?

If a company is strong enough to survive tough times, it is more likely to provide long-term value.
8. Investing

Inventory turnover is a ratio that shows how quickly a company uses up its supply of goods over a given time frame. Inventory turnover may be calculated as the market value of sales divided by ...
9. ETFs & Mutual Funds

### How to Calculate a Turnover Ratio

A turnover ratio measures a mutual fund’s level of trading activity in a given time period, usually a year.
10. Managing Wealth

### Asset Turnover Ratio

Investopedia explains: The asset turnover ratio is a measure of a company's ability to use its assets to generate sales or revenue, and is a calculation of the amount of sales or revenue generated ...
RELATED FAQS
1. ### What do efficiency ratios measure?

Learn about efficiency ratios, what they measure, how to calculate commonly used efficiency ratios and how to interpret these ... Read Answer >>
2. ### Which financial ratios are considered to be efficiency ratios?

Learn about efficiency ratios, what financial ratios are considered efficiency ratios, and how to calculate three different ... Read Answer >>
3. ### How can an investor determine the efficiency of a company's working capital management?

Learn how working capital is vital to a company’s survival. Also learn key metrics investors use to assess how efficiently ... Read Answer >>
4. ### Why are efficiency ratios important to investors?

Learn about efficiency ratios, such as the asset turnover ratio, and why these metrics are important to investors when analyzing ... Read Answer >>
5. ### What are some examples of efficiency ratios used in measuring businesses?

Learn about some of the most common efficiency ratios that market analysts and investors use in the process of evaluating ... Read Answer >>
6. ### What does inventory turnover tell an investor about a company?

Find out more about the inventory turnover ratio, what the ratio measures and what the inventory turnover ratio indicates ... Read Answer >>
Hot Definitions
1. ### AAA

The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
2. ### GBP

The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
3. ### Diversification

A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
4. ### European Union - EU

A group of European countries that participates in the world economy as one economic unit and operates under one official ...
5. ### Sell-Off

The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
6. ### Brazil, Russia, India And China - BRIC

An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...