Activity (or Turnover) Ratio

Activity ratios measure how efficiently a business uses its assets to generate sales. They are also called turnover ratios because they show how many times an asset (or a group of assets) is "turned over" or converted into sales during an accounting period. A higher turnover ratio generally means better asset utilisation, which leads to improved efficiency and profitability. That is why these ratios are sometimes referred to as efficiency ratios.

The six important activity ratios covered in this section are:

1. Inventory Turnover Ratio
2. Trade Receivables Turnover Ratio
3. Trade Payables Turnover Ratio
4. Investment (Net Assets) Turnover Ratio
5. Fixed Assets Turnover Ratio
6. Working Capital Turnover Ratio

Each of these ratios is calculated using a specific formula, and the interpretation depends on the nature of the business and industry standards. The textbook does not provide the individual formulas or detailed calculations for each ratio in this section — it only introduces the concept and lists the ratios. The actual formulas and worked-out examples appear later in the chapter. …