what is an activity ratio 
an activity ratio is a type of financial metric that indicates how efficiently a company is leveraging the assets on its balance sheet to generate revenues and cash commonly referred to as efficiency ratios activity ratios help analysts gauge how a company handles inventory management which is key to its operational fluidity and overall fiscal health xiaojie liu investopediaunderstanding activity ratiosactivity ratios are most useful when employed to compare two competing businesses within the same industry to determine how a particular company stacks up among its peers but activity ratios may also be used to track a company s fiscal progress over multiple recording periods to detect changes over time these numbers can be mapped to present a forward looking picture of a company s prospective performance activity ratios can be broken down into the following subcategories the accounts receivable turnover ratio determines an entity s ability to collect money from its customers total credit sales are divided by the average accounts receivable balance for a specific period a low ratio suggests a deficiency in the collection process the merchandise inventory turnover ratio measures how often the inventory balance is sold during an accounting period the cost of goods sold cogs is divided by the average inventory for a specific period higher calculations suggest that a company can move its inventory with relative ease the total assets turnover ratio measures how efficiently an entity uses its assets to tender a sale total sales are divided by total assets to decipher how proficiently a business uses its assets smaller ratios may indicate that a company is struggling to move its products a performance metric known as return on equity roe measures the revenues raised from shareholder equity roe is calculated by dividing net income by all outstanding stock shares in the market a metric called the asset turnover ratio measures the amount of revenue that a company generates per dollar of assets this figure which is simply calculated by dividing a company s sales by its total assets reveals how efficiently a company is using its assets to generate sales activity ratios vs profitability ratiosactivity ratios and profitability ratios are both fundamental analytical tools that help investors evaluate different facets of a company s fiscal strength profitability ratios depict a company s profit generation while activity ratios measure how well a company utilizes its resources to generate those profits profitability ratios may help analysts compare a company s profits with those of its industry competitors while also tracking the same company s progress across several different reporting periods 