Activity Ratios

Activity ratios are balance sheet based items against income statement items. The idea is to relate the change in the balance sheet value for a particular account (inventory, receivables, fixed assets, accounts payable, working capital and total assets against their corresponding interaction with the profit and loss statement.  Activity ratios provide the reader with an idea of how efficient the business is with use of assets.

Accounts Receivable Turnover Ratio

Accounts Receivable Turnover Rate

One of the activity ratios in business is the receivables turnover ratio or rate.   This ratio measures the frequency of collecting the entire balance of accounts receivable during a standard accounting year.   The ideal turns rate is twelve with a higher value indicating an aggressive collection process.   A lower value is a warning about accounts receivable management.

Business Ratios (Introduction)

Percentage of Completion

Ratios are used in business to compare companies of different sizes within the same industry. The goal is to discover the best investment for return on your stock purchase.  Business ratios essentially equalize different size companies within the same industry.  A common mistake is to compare two different industries within the same sector (explained below).

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