An activity ratio measures the relationship between a firm’s level of operations, usually stated in terms of sales (turnover), and the assets needed to maintain the activity, it indicating the efficiency with which a firm uses its assets. Average assets held during a period are used for comparison with the income statement items (e.g., sales or COGS). The higher the activity ratio, the more a given level of sales can be maintained with relatively fewer assets. Activity ratios include:
- Receivables turnover – Measures the number of times receivables are collected during the period:
Net Sales/Average Accounts Receivable (or Trade Receivables)
or
Credit Sales/Average Accounts Receivable (or Trade Receivables)
- Average collection period – A variant of the receivables turnover ratio that converts it into the number of days takes for a firm to collect its receivables:
365/Receivables Turnover
- Accounts payable to sales – An indication of how a company is using its suppliers as a source of working capital:
Accounts Payables/Net Sales
- Inventory turnover – Measures the efficiency of a company in managing and selling its inventory:
COGS/Average Inventory
or
Net Sales ÷ Average Inventory
- Average days to sell inventory – The average number of days inventory is held until it is sold:
365/Inventory Turnover
- Fixed-asset turnover – Measures the productivity and efficiency of property, plant and equipment (PP&E) in generating revenue:
Net Sales/Average PP&E
- Total-asset turnover – Measures the sales volume a company generates relative to its total investment in assets:
Net Sales/Average Total Assets