# 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.

## Value Investing – Business Ratios (Lesson 12)

Business ratios are used to compare similar companies within the same industry. RULE #1: DO NOT USE BUSINESS RATIOS TO COMPARE COMPANIES AGAINST EACH OTHER IF THEY ARE IN DIFFERENT INDUSTRIES.

In effect, business ratios have a purpose, although limited. They are the best tools to compare similar companies within the same industry and typically the same market capitalization tier. Thus, a second rule to use with rule number one above; RULE #2: USE BUSINESS RATIOS TO COMPARE SIMILAR MARKET CAPITALIZATION COMPANIES WITHIN THE SAME INDUSTRY.

Because business ratios can be easily manipulated, it is important that users of business ratios have a full understanding of their respective formulas. RULE #3: BUSINESS RATIOS ARE NOT AN ABSOLUTE RESULT. They are merely indicators and that is all they are good for when interpreting their results.

Even with the above limitations, business ratios are beneficial to investors as they are the best method of comparing existing or potential investments. Their results are not perfect, but they can indeed provide adequate confidence when making pertinent decisions about a companies current financial status.

## Total Assets Turnover Rate – Formula and Analysis

Within the group of activity ratios, the total assets turnover rate is the broadest in scope. Similar to other activity ratios, it utilizes net sales as the numerator. However the denominator doesn’t focus in on a single balance sheet asset group like the working capital turnover or fixed assets turnover rates, it includes all assets.

## Accounts Receivable Turnover Ratio

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.