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.
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.

Efficiency Ratio
Ratios that are typically used to analyze how well a company ... 
Receivables Turnover Ratio
An accounting measure used to quantify a firm's effectiveness ... 
Working Capital Management
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Current Ratio
The current ratio is a liquidity ratio measuring a company's ... 
Asset Turnover Ratio
The amount of sales generated for every dollar's worth of assets ... 
Accounting Ratio
A way of expressing the relationship between one accounting result ...

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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 >> 
Which financial ratios are considered to be efficiency ratios?
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Why are efficiency ratios important to investors?
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How do I use ratios to perform a financial analysis?
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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 >> 
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 >>