WHAT ARE ACTIVITY RATIOS? (EASIEST EXPLANATION) Straight to the Point

In around two minutes you will know what are Activity Ratios. You will get both professional definition and easy explanation. No intro, no outro, straight to the point.

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Activity Ratios are financial metrics that estimate how efficiently the management of a company uses its assets to generate revenue.

The most popular activity ratios would be asset turnover ratio, inventory turnover ratio, accounts receivable turnover ratio, and fixed assets turnover ratio. And if you are not sure what some of them mean, feel free to watch my other videos.

Assets, such as equipment, machinery, or personnel, is what helps companies to make money. The result of business activities are goods, that are recorded as inventory on the balance sheet.

And activity ratios, inventory turnover ratio in this case, shows how effectively the inventory control is handled. Specifically, how fast a company can sell and restock its products.

Asset turnover ratio in return shows how much sales a company makes on each dollar of assets they own. Which also gives insights to investors and management team, whether assets are being used effectively.

That is why some people call activity ratios as efficiency ratios.

Besides assets usage efficiency, activity ratios can tell whether the business activities are streamlined. Which is especially important for companies that sell products at a very fast rate, such as grocery stores and restaurants. Even the slightest delay can create a disruption in the whole business cycle.

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*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.