Activity Ratios (Efficiency Ratios) | Financial Statement Analysis

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Activity ratios (aka efficiency ratios) tell you how well a company is performing in certain areas. For example:

1. asset turnover tells you how well the company is using its assets to generate sales (asset turnover is thus a measure of sales efficiency)

2. fixed asset turnover tells you how well the company is using its property, plant, and equipment to generate sales

3. inventory turnover tells you how many times the company sold its inventory during the period (dividing 365 by inventory turnover tells you how many days it took the company to sell its inventory)

4. receivables turnover tells you how many times the company collected its receivables during the period (dividing 365 by receivables turnover tells you how many days it took the company to collect its receivables; this is called days sales outstanding)

5. payables turnover tells you how many times the company paid the balance owed to its suppliers during the period (dividing 365 by payables turnover tells you how many days it took the company to pay its suppliers; this is called days payable outstanding)

The sum of (a) days to sell inventory and (b) days sales outstanding is the company's operating cycle. Subtracting days payable outstanding from the operating cycle tells you the company's cash conversion cycle.

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Awesome. You should start a series on financial modelling too.

Sai-tek
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Sir so here Colgate Palmolive is better right cuz it has 2 ratios better DSO n DPO?

amareshangle
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Can I calculate accounts payable turnover by using the following formula

Accounts payable turnover = Total inventory purchases (raw material purchases) during the year / average accounts payable

KrishanSingh-gzop