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Activity Ratios — Ratio Mastery Part V
- Activity ratios assess how efficiently a business leverages its assets to drive revenue.
- The Accounts Receivable Turnover Ratio measures how efficiently a company collects payments from its customers relative to its credit sales.
- The Inventory Turnover Ratio measures how efficiently a company manages its inventory relative to its sales.
- The Days Sales Outstanding (DSO) measures how efficiently a company collects its receivables relative to its credit sales.
- The Number of Days of Payables (DPO) measures how efficiently a company manages its accounts payable relative to its purchases.
- The Working Capital Turnover Ratio measures how effectively a company utilizes its working capital to generate sales.
- The Total Assets Turnover Ratio measures how efficiently a company utilizes its total assets to generate revenue.
- Venture capitalists closely examine activity ratios to see how well a business manages its resources to maintain healthy cash flow and scalability.
- Weak activity ratios may indicate operational issues, increasing risk for VCs and deterring investment.
- Businesses should balance efficiency with customer relationships and sales opportunities in order to maintain optimal financial performance.
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