Activity Ratios
Measures the amount of resources invested in a company’s collection and inventory management. It determines how well an organization manages materials, inventory, and debt.
Inventory turnover ratio
– Number of times a company has sold and replaced inventory during a given period.
– Inventory turnover ratio: Cost of Goods Sold / Average Inventory OR Total Sales / Average Inventory
– Higher number indicates insufficient inventory and strong sales, while a lower number suggest weak sales and excess inventory.
Total Asset Turnover Ratio
– Measures the value of a company’s sales or revenues relative to the value of its assets. It can be an indicator of the efficiency with which a company is using its assets to generate revenue.
– Asset turnover ratio: Total Sales / Average Total Assets
Average total assets: (Beginning total assets + ending total assets) / 2
– Higher ratio suggests that the company has a better performance
Accounts Receivable Turnover
– Number of times per year that the company is collecting its receivables. Determines an entities ability to collect money from its customers.
– Receivables turnover ratio: Net credit sales / Average accounts receivable
Net credit sales: Sales on credit – Sales returns – Sales Allowances
Average accounts receivable: (Beginning A/R + Ending A/R) / 2
– Higher number suggests that management is doing well with collecting receivables, while a lower number shows a deficiency in the collection process.
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