What Are Operating Activities?

Operating activities refer to all transactions and matters other than corporate investment activities and financing activities. The scope of business activities is very wide. For industrial and commercial enterprises, they mainly include: selling goods, providing labor services, operating leases, purchasing goods, accepting labor services, advertising, promoting products, paying taxes, etc. Cash flows from operating activities are mainly related to obtaining net profit. The formation of the company's net profit is related to the specific content of the profit. The net profit in a certain period of the income statement does not necessarily constitute the cash flow generated from operating activities, such as the net income and net loss of disposal of fixed assets, and other activities Profit or loss is a component of net profit, but not a cash flow from operating activities. ^[1]

Business activity

Operating activities refer to all transactions and matters other than corporate investment activities and financing activities. The scope of business activities is very wide. For industrial and commercial enterprises, they mainly include: selling goods, providing labor services, operating leases, purchasing goods, accepting labor services, advertising, promoting products, paying taxes, etc. Cash flows from operating activities are mainly related to obtaining net profit. The formation of the company's net profit is related to the specific content of the profit. The net profit in a certain period of the income statement does not necessarily constitute the cash flow generated from operating activities, such as the net income and net loss of disposal of fixed assets, and other activities. Profit or loss is a component of net profit, but not a cash flow from operating activities. ^[1]

is based on

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1 . Asset Turnover Asset Turnover = Turnover / Total Assets Asset Turnover = Total Revenue / Total Asset Asset Turnover represents the turnover generated by each unit of assets. Things to note:

Low-margin companies often have high asset turnover, and high-margin companies often have lower asset turnover.

This ratio is useful for growing companies.

Asset turnover analysis: This ratio determines how much revenue each dollar of assets can generate. A company's low asset turnover rate means that it can achieve high profit margins. Highly competitive industries, such as retail, often have high asset turnover, which is caused by price competition. 2 Collection Ratio Collection Ratio = Accounts Receivable / (Revenue / 365) Collection Ratio = Accounts Receivable / (Revenue / 365) This ratio indicates the average number of days that the company will recover the account from the unpaid bills. Things to note:

A high collection ratio indicates that the company has a problem in recovering the accounts due to provide products or services.

This ratio has quarterly effects, some quarters are higher, and some quarters are smaller.

Collection ratio analysis: Some companies have a collection ratio of 37 days, because most companies pay on a monthly basis. But if we like to calculate this ratio, we can use non-cash payments because cash purchases will make the payment immediately. 3 Inventory Turnover Inventory Turnover = Cost of Goods Sold / Average or Current Period Inventory This ratio represents the level of inventory turnover. Note:

Low turnover is a bad phenomenon

Relatively high inventory turnover of perishable goods

In order to get an accurate inventory turnover rate, we usually use (starting inventory + last inventory) / 2 to calculate the average inventory.

Analysis of inventory turnover rate: The quality of the inventory turnover rate index reflects the level of the company's inventory management. It affects the short-term debt repayment ability of the enterprise and is an important content of the entire enterprise management. Generally speaking, the faster the inventory turnover, the lower the inventory occupancy level, the stronger the liquidity, and the faster the inventory is converted into cash or receivables. Therefore, increasing the inventory turnover rate can improve the company's liquidity