Shipping Terms

Commonly Used Terms

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Activity Ratio

How quickly a business can turn its assets into cash or sale is a good indicator of how well that business is being run. Activity Ratio measures how effectively a business uses its assets. It is commonly referred to as efficiency ratios; activity ratios are a fine indicator of how a company handles its inventory management. 

Management and accounting departments use multiple Activity Ratios to gauge the efficiency of their businesses. These Activity Ratios are as follows:

  1. Total Assets Turnover Ratio
  2. Fixed Assets Turnover Ratio
  3. Inventory Turnover Ratio
  4. Accounts Receivable Turnover Ratio
  5. Working Capital Ratio 

How to calculate activity ratio?

  1. Total Assets Turnover Ratio : This ratio measures how fast a company turns its assets into revenue. It measures the efficiency with which a business uses its assets to generate sales. 

Total Assets Turnover Ratio = Sales / Average Total Assets

  1. Fixed Assets Turnover Ratio: This ratio measures the ability of the business to generate sales from Fixed assets such as property, plant, and equipment.

Fixed Assets Turnover Ratio = Net Sales/ (Total Fixed Assets - Depreciation)

  1. Inventory Turnover Ratio: Reveals the number of times a company created its inventory and sold it over a certain period of time. It denotes the efficiency with which the inventory is managed. 

Inventory Turnover Ratio = Costs of Goods Sold/ Average cost of Inventory.

  1. Accounts Receivable Turnover Ratio : It depicts how efficiently a business provides credit to its customers and collects debts. To measure this ratio, only the credit sales are taken into account and not the cash sales. 

Accounts Receivable Turnover Ratio = Net Credit Sales/ Average Accounts Receivable

It is a good sign when the accounts receivables turnover ratio is high since the debts are being paid on time.

  1. Working Capital Ratio : Working capital is current assets less current liabilities. The ratio helps the business figure out the net annual sales generated by the average amount of working capital for a year.

Working Capital Ratio = Net sales/ Average Working Capital.

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