A business will have different types of assets and cash holdings. A financial analysis tool that is used to find how soon you can convert the assets into cash is called Activity ratio. Every company must be aware of how fast they can access their cash so that they can pay any outstanding bills at any time.
Why is it important?
Activity ratios are important to assess the company’s efficiency to generate revenue in hard cash. These ratios are very critical in evaluating a company’s background or fundamental makeup. As it indicates the efficiency of management of assets it is termed as Turnover Ratios or Asset Management Ratios.
Types of Activity Ratios
Based on the types of assets activity ratios can be classified as:
- Debtor/Receivable turnover ratio: It indicates the rate of conversion of debtors holding into cash.
- Stock/Inventory turnover ratio: It indicates the frequency of conversion of the company’s stocks into cash in a financial year.
- Assets turnover ratio: This ratio indicates the value of revenue that was generated for the value of money that was invested.
The activity ratio is an absolute number that represents the efficient utilization of assets. Higher the number better is its efficiency. Also the ratios will have different margins based on the asset category.
Activity ratio is a new word I hear a lot now a days, I just read through your artical its clearly explained about it.The different type which you have mentioned above is really an new information
The topic of activity ratio was explained in a gist. The language was simple, which makes it easy for laymen to understand it. The points covered in the article are very lucid and the writer made it easy by using colloquial language. Types of activity ratio could have been explained a bit more, for proper understanding.