Lesson 3 of 8 · 15 min
Activity ratios
Activity ratios measure how efficiently a company uses its working capital and long-term assets: how fast inventory sells, customers pay and suppliers are paid, and how much revenue each unit of assets produces.
In short
- Inventory turnover = COGS ÷ average inventory; days of inventory on hand (DOH) = 365 ÷ inventory turnover.
- Receivables turnover = revenue ÷ average receivables; days of sales outstanding (DSO) = 365 ÷ receivables turnover.
- Payables turnover = COGS ÷ average trade payables; number of days of payables = 365 ÷ payables turnover.
- Working capital, fixed asset and total asset turnover = revenue ÷ the average of each asset base.
- Interpretation is two-sided: high inventory turnover may mean efficiency or too little stock; compare revenue growth with the industry to tell which.
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