What are the types of activity ratios? Explain with formula and example?

 

Activity ratios are financial metrics that measure a company's efficiency and effectiveness in managing its resources, specifically its assets. The following are some common types of activity ratios:

1. Inventory Turnover: 

   This ratio measures how quickly a company is able to sell its inventory. The formula is: 

   Inventory turnover = Cost of goods sold / Average inventory. 

   For example, if a company's cost of goods sold is $1,000,000 and its average inventory is $200,000, its inventory turnover is 5 (1,000,000 / 200,000).

2. Accounts Receivable Turnover: 

   This ratio measures how quickly a company is able to collect payment from its customers. The formula is: 

   Accounts receivable turnover = Net credit sales / Average accounts receivable. 

   For example, if a company's net credit sales is $1,000,000 and its average accounts receivable is $200,000, its accounts receivable turnover is 5 (1,000,000 / 200,000).

3. Days Sales Outstanding (DSO): 

   This ratio measures how long it takes for a company to collect payment from its customers. The formula is: 

   DSO = (Accounts receivable / (Net credit sales / 365)) days. 

   For example, if a company's accounts receivable is $200,000 and its net credit sales is $1,000,000, its DSO is 61.68 days (200,000 / (1,000,000 / 365) days).

4. Fixed Asset Turnover: 

   This ratio measures how effectively a company is using its fixed assets (property, plant, and equipment) to generate sales. The formula is: 

   Fixed asset turnover = Net sales / Average fixed assets. 

   For example, if a company's net sales is $1,000,000 and its average fixed assets is $200,000, its fixed asset turnover is 5 (1,000,000 / 200,000).

5. Total Asset Turnover: 

   This ratio measures how effectively a company is using all of its assets to generate sales. The formula is: 

   Total asset turnover = Net sales / Average total assets. 

   For example, if a company's net sales is $1,000,000 and its average total assets is $200,000, its total asset turnover is 5 (1,000,000 / 200,000).

6. Debt-to-Asset ratio: 

   This ratio measures the proportion of a company's assets financed by debt. The formula is: 

   Debt-to-Asset ratio = Total liabilities / Total assets. 

   For example, if a company has total liabilities of $200,000 and total assets of $1,000,000, its debt-to-asset ratio is 0.2 (200,000 / 1,000,000).

7. Debt-to-Equity Ratio: 

   This ratio measures the proportion of a company's equity financed by debt. The formula is: 

   Debt-to-equity ratio = Total liabilities / Total equity. 

   For example, if a company has total liabilities of $200,000 and total equity of $1,000,000, its debt-to-equity ratio is 0.2 (200,000 / 1,000,000).

8. Working Capital Ratio: 

   This ratio measures a company's ability to meet its short-term obligations. The formula is: 

   Working capital ratio = Current assets / Current liabilities. 

   For example, if a company has current assets of $200,000 and current liabilities of $100,000, its working capital ratio is 2 (200,000 / 100,000).