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Activity ratios are financial metrics used to evaluate how efficiently a company utilises its assets to generate revenue. These ratios focus on operational efficiency rather than profitability or liquidity. By analysing activity ratios, investors and analysts can understand how well a business manages inventory, receivables, payables, and overall asset usage in daily operations.
An activity ratio measures the speed at which a company converts its resources into sales or cash. It indicates how effectively management is using assets such as inventory, receivables, and fixed assets. Higher activity ratios generally suggest efficient utilisation of assets, while lower ratios may indicate inefficiency, idle resources, or weak operational control. These ratios are especially useful when comparing companies within the same industry.
Here’s why activity ratios matter:
Help assess operational efficiency
Indicate quality of asset utilisation
Support working capital management
Aid comparison between similar companies
Highlight bottlenecks in operations
Assist management in performance evaluation
Useful for investors and creditors
There is no single formula for activity ratios, as each ratio focuses on a different asset or operational element. In general, activity ratios relate sales or cost of goods sold to average asset balances. The basic idea is to measure how frequently assets are turned over during a period. Most formulas use average values to provide a more accurate picture of operational efficiency over time.
Each ratio highlights efficiency in a specific area of business operations.
Debtors (Receivables) Turnover Ratio
Creditors (Payables) Turnover Ratio
Working Capital Turnover Ratio
Fixed Assets Turnover Ratio
The inventory turnover ratio measures how many times inventory is sold and replaced during a period. It is calculated by dividing cost of goods sold by average inventory. A higher inventory turnover ratio indicates efficient inventory management and strong sales, while a lower ratio may suggest overstocking, slow-moving goods, or weak demand. This ratio is particularly important for manufacturing and retail businesses.
Here’s how activity ratios are interpreted, highlighting efficiency and trends over time:
Higher ratios usually indicate improved efficiency
Compare ratios with industry averages
Analyse trends over multiple periods
Extremely high ratios may indicate underinvestment
Low ratios can signal operational inefficiencies
Use ratios together, not in isolation
Following are the advantages of activity ratios:
Measure operational efficiency clearly
Help optimise asset usage
Support improved inventory and credit control
Useful for internal management decisions
Improve comparative financial analysis
Assist investors in evaluating performance
Here’s a look at their limitations:
Do not measure profitability directly
Can vary significantly across industries
Affected by accounting policies
Historical data may not reflect future performance
Seasonal businesses may show distorted ratios
Activity ratios play an important role in analysing how effectively a company manages its assets and operations. They provide insights into inventory movement, asset utilisation, and working capital efficiency. While activity ratios are valuable for operational analysis, they should be used alongside other financial ratios for a complete evaluation of business performance.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
An activity ratio measures how efficiently a company utilises its assets to generate sales or cash over a specific period. It provides insight into operational efficiency and helps evaluate the effectiveness of asset management in day-to-day business activities.
There is no single formula for activity ratios. They are generally calculated by dividing sales or cost of goods sold by average asset balances, depending on the type of ratio, to assess how effectively a company employs its resources.
Common types of activity ratios include inventory turnover, receivables turnover, payables turnover, fixed asset turnover, and total asset turnover. Each ratio evaluates a specific aspect of asset utilisation and overall operational efficiency within a company.
Activity ratios are important because they assess how effectively a company uses its assets to generate revenue. They offer insights into operational efficiency, resource utilisation, and management performance in conducting routine business operations.
Activity ratios measure how efficiently a company uses its assets to generate revenue, while liquidity ratios evaluate a company’s capacity to meet short-term obligations, providing insights into cash flow and immediate financial stability.
Anshika brings 7+ years of experience in stock market operations, project management, and investment banking processes. She has led cross-functional initiatives and managed the delivery of digital investment portals. Backed by industry certifications, she holds a strong foundation in financial operations. With deep expertise in capital markets, she connects strategy with execution, ensuring compliance to deliver impact.
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