Activity Ratios with Formula and Example

Activity ratios measures how efficiently the business is running. We often call this as “Assets Management Ratio” i.e. how efficiently the assets of the company is being used by the management to generate maximum possible revenue. Usually, this ratio indicates how much sales have taken place in comparison to various categories of assets.

Importance of Activity Ratios

This ratio helps to understand how efficient the management of the company is. As this ratio measures the efficiency of the utilization of assets of the company.

Types of Activity Ratios

• Total Assets Turnover Ratio
• Fixed Assets Turnover Ratio
• Current Assets Turnover Ratio
• Working Capital Turnover Ratio
  • Stock Turnover ratio
  • Debtor Turnover ratio
  • Creditors Turnover ratio

A. Total Assets Turnover Ratio

This ratio measures the efficiency of the firm in utilizing its Assets. A high ratio represents efficient utilization of total Assets in generating sales. Formula: (Sales or Cost of Goods Sold)/ Total Assets

B. Fixed Assets Turnover Ratio

This ratio measures the efficiency of the firm in utilizing its Fixed Assets. A high ratio represents efficient utilization of Fixed Assets in generating sales. Formula: (Sales or Cost of Goods Sold)/ Fixed Assets

C. Current Assets Turnover Ratio

This ratio measures the efficiency of the firm in utilizing its Current Assets. A high ratio represents efficient utilization of Current Assets in generating sales. Formula: (Sales or Cost of Goods Sold)/ Current Assets

D. Working Capital Turnover Ratio

This ratio measures the efficiency of the firm in utilizing its Working Capital. A high ratio represents efficient utilization of working Capital in generating sales. Formula: (Sales or Cost of Goods Sold)/ Working Capital

i. Stock Turnover ratio

This ratio describes the relationship between the cost of goods sold and inventory held in the business. This ratio indicates how fast inventory/ Stock is consumed/ sold. A high ratio is good for the company. Low ratio indicated that stock is not consumed/ sold or remains in a warehouse for a longer period of time.

Formula: Cost of Goods Sold/Average Inventory

Average Inventory = (Opening Stock + Closing Stock)/2

ii. Debtor Turnover ratio

This ratio helps the company to know the collection and credit policies of the firm. It measures how efficiently the management is managing its accounts receivable. A high ratio represents better credit policy as compared to a low ratio.

Formula: Credit Sales/Average Debtors

Average Debtor = (Opening Debtor + Closing Debtor)/2

iii. Creditors Turnover ratio

This ratio helps the company to know the payment policy that is being offered by the vendors to the company. It also reflects how management is managing its account payable. A high ratio represents that in the ability of management to finance its credit purchase and vice versa.

Formula: Credit Purchase/ Average Creditors

Average Creditor = (Opening Creditor + Closing Creditor)/2