Activity Ratios are a form of financial metric that gauges how efficiently a company is using its available assets to generate revenue and cash. This type of ratio is used in order to compare businesses in the same sector, as well as to evaluate a single company’s performance over time. By assessing activity ratios, investors are able to make an informed decision as to the company’s financial health, and how well its assets are working together to consider the company’s bottom line.

Activity ratios can be divided into several different categories, such as merchandise inventory turnover ratios, total assets turnover ratios, and return on equity measurements.

For example, merchandise inventory turnover ratios measure how quickly a business is converting its merchandise inventory into sales and are generally expressed on an annual basis. If a company has a merchandise inventory turnover of 5, this means that the company’s inventory has circulated through five times in the most recent year.

Similarly, total assets turnover ratio measures the efficiency of a company in using its total assets to generate revenue and is expressed as a percentage. For example, if a company has a total assets turnover ratio of 10%, this means that the company is using 10% of its total assets to generate revenue.

Another example is return on equity measurements, which measures how effectively a company is using shareholder funds to generate additional returns. This measures the profits earned from shareholder equity over a certain period, generally expressed as a percentage.

Activity ratios are a valuable tool for equity investors, as they allow investors to accurately assess the efficiency of a company’s assets in producing returns over a certain period of time. By understanding these ratios, investors are able to make an informed decision regarding potential investments.