Some of the more frequently used activity ratios, aside from those mentioned earlier, are the following.
What are the Different Types of Activity Ratios? While there are numerous variations of activity ratios such as the accounts receivable turnover ratio and inventory turnover ratio, the shared purpose of each ratio is to determine how well a company can utilize its operating assets.Īn improvement in activity ratios tends to correspond with higher profit margins, since more value is extracted from each asset. The majority of companies closely track their accounts receivable (A/R) and inventory trends hence, these accounts are frequently used in the denominator of activity ratios. Working Capital Turnover Ratio = Revenue ÷ Average Working Capital What is a Good Activity Ratio?Īs a general rule of thumb, the higher the turnover ratio, the better - since it implies the company can generate more revenue with fewer assets. The formula to calculate the total asset turnover ratio, fixed asset turnover ratio and working capital turnover ratio – three of the more common activity ratios – are as follows. Activity Ratio FormulaĮach activity ratio consists of revenue in the numerator and then a measure of an asset(s) in the denominator. Therefore, by comparing the two sides - revenue and an asset metric - each “turnover” ratio measures the relationship between the two and how they trend over time. One can gauge a company’s ability to manage its current assets such as inventory and accounts receivable (A/R) as well as its long-term assets, or fixed assets (PP&E), to generate more revenue. In theory, the underlying objective of a well-managed company is to derive as much revenue as possible using the least amount of resources, which often establishes an economic moat.Ī “moat” refers to a sustainable competitive advantage that protects a company’s long-term profits and existing market share from external threats.
#CALCULATE TOTAL ASSET TURNOVER HOW TO#
How to Calculate Activity Ratio (Step-by-Step)Īn activity ratio, or asset utilization ratios, determines the efficiency at which a company utilizes its assets, and is an indicator of how efficient a company is at asset allocation. An Activity Ratio is a measure of operating efficiency, with regard to a company’s capacity to utilize its asset base to generate revenue.
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