What is an activity ratio?
The ratio of activity is one of several accounting conditions that measures how quickly the company can transfer some of its assets to cash or income. Three commonly evaluated activity ratios are asset turnover ratio, rendering ratio and receivable turnover ratio. The activity ratio, along with other accounting conditions, is used in a basic analysis to determine the relative power of the company compared to its competitors. The information used to calculate the activity ratio is found in the balance sheet of the company or statement of profit and loss.
The turnover ratio indicates how quickly the company can turn an asset into cash on average. Asset turnover ratio is calculated by division of sales by average total assets. If annual sales are $ 1 million in the US (USD) and the average assets are $ 500,000 throughout the year, the ratio of assets is 2. This means that the company converts its assets twice a year. The higher asset turnover ratio is better, the part of the fact that society more often turns its assets, so fasterconverts assets for sale.
Inventory turnover ratio suggests how often the company converts its income inventory. Again, the higher ratio is better because it suggests that the company is moving the product quickly from its warehouse to shops and eventually into the hands of consumers. Analysts can determine the ratio of reserves by distributing the sale by an average inventory.
The effectiveness of the company in collecting money owed by customers is measured according to the ratio of receivables turnover, sometimes called the ratio of receivables turnover. To determine analysts of this ratio, they distribute net credit sale with average receivables. A low ratio may mean that the company has difficulty collecting from its customers. A company that carries out most or all its business based on cash will have a very hpometer of receivables turnover.
As with all the accounting conditions used in basic analysis, it is important to compare whatOLI The ratio of activity between companies in the same industry. Some industries will usually have much lower conditions than others, so comparing companies across industries usually create irrelevant data. For example, an activity ratio for a manufacturing company will usually be much lower than the same activity ratio for fast food company. In order to compare the ratio of activity between two or more companies, companies should be in the same industry.