Activity ratios are often the most ignored of the business ratios. In reality, they are the most important. Why?
The majority of activity ratios measure the ability of the company to turn assets into earnings. All businesses utilize a simple principle, buy an asset at a low price and sell it at a higher price. Even service based operations do this. Labor is purchased for a certain value and then sold for a much higher price. Retail businesses purchase inventory and then turn around, mark it up and then sell it to make a profit. There isn’t any business out there that doesn’t exercise this basic business tenet.
Activity ratios measure this aspect of business. With activity ratios, the word ‘Turnover’ is the common binding word used. When you hear the word turnover, think of an activity ratio.
All, except one, of the activity ratios are tied
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