Activity Ratios

Chapter 17: Finish the Financials - Page 17.4

Activity Ratios

Activity ratios focus on financial performance.

These ratios are generally used to compare a company's performance to the average for its industry. Levels of acceptability tend to vary widely between different industries. For example, large manufacturing companies might have a very low assets turnover, but retail stores should have a high turnover.

Accounts Receivable Turnover: sales on credit divided by accounts receivable. This is a measure of how well your business collects its debts.
Collection Days: accounts receivable multiplied by 360, then divided by annual credit sales is another measure of debt collection and value of receivables. Generally, 30 days is exceptionally good, 60 days is bothersome, and 90 days or more is a real problem. This varies by industry.
Inventory Turnover: cost of sales divided by the average balance of inventory. The higher the turnover, the better for cash flow and working capital requirements.
Accounts Payable Turnover: a measure of how quickly the business pays its bills. It divides the total new accounts payable for the year by the average accounts payable balance.
Total Assets Turnover: sales divided by total assets.

Debt Ratios

Debt ratios look at what you owe.

Debt to Net Worth: total liabilities divided by total net worth.
Short-term Debt to Liabilities: short-term debt divided by total liabilities. This is a measure of the depth and term of debt.

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