Activity or efficiency ratio reflects the intensity of a company’s resource utilization or how efficient management team uses its assets or capital to generate sales.
Inventory Turnover Ratio
The inventory turnover ratio indicates how efficient the firm is in managing investment in inventories as seen by the number of times its inventories are turned over or replenished during the year.
This ratio is derived by dividing the total cost of goods sold by the average inventory figure (the average of the beginning and ending inventory figures for the year).
The example of inventory turnover ratio is:
The higher the better.
Average Collection Period
The firm’s efficiency in managing accounts receivable is measured by the average collection period which reflects how rapidly the company’s credit accounts are being collected.
The average collection period is calculated as below:-
Obviously, the shorter the better.
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