ACTIVITY RATIOS Meaning and
Definition
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Activity ratios, also known as asset management ratios, are financial metrics used to evaluate the efficiency and effectiveness of a company's utilization of its assets. They provide insights into how well a company is able to manage its current assets and liabilities and generate revenue from its operations.
One commonly used activity ratio is the inventory turnover ratio, which measures the number of times inventory is sold and replenished over a specific period. A high inventory turnover ratio indicates that a company efficiently manages its inventory and avoids stockouts or obsolete items. On the other hand, a low ratio suggests potential issues with inventory management, such as overstocking or slow sales.
Another activity ratio is the accounts receivable turnover ratio, which indicates the effectiveness of a company's credit policy and collection efforts. It measures the average number of times accounts receivable are collected during a given period. A high turnover ratio indicates efficient collection practices, while a low ratio may raise concerns about slow collection and potential bad debts.
A third common activity ratio is the fixed asset turnover ratio, which measures how effectively a company utilizes its fixed assets, such as property, plant, and equipment. Higher turnover ratios indicate optimal utilization, whereas low ratios may suggest inefficient asset management.
Overall, activity ratios help analysts and investors gauge a company's operational efficiency, identify potential strengths and weaknesses, and make informed decisions regarding investment opportunities or creditworthiness.
Etymology of ACTIVITY RATIOS
The etymology of the word "activity ratios" is a combination of two words: "activity" and "ratios".
1. Activity: The word "activity" comes from the Latin word "activus", meaning "having the power to act or move". It was derived from the verb "agere", meaning "to do" or "to act". Over time, the word "activity" developed in English to signify the state of being active or engaged in action.
2. Ratios: The term "ratios" comes from the Latin word "ratio", meaning "reckoning, reason, proportion", and later adopted into English as "ratio". It involves the comparative relationship between two or more quantities or amounts.
