Activity Ratio
What it is:
An activity ratio is a metric which determines the ability of a company to convert its balance sheet accounts into revenue.
How it works (Example):
Activity ratios assess how effectively a company is able to generate revenue in the form of cash and sales based on its asset, liability and capital share accounts. Examples of such ratios include the inventory turnover ratio and the accounts receivable turnover ratio.
Why it Matters:
Activity ratios are critical in evaluating a company's fundamentals because, in addition to expressing how well a company generates revenue, activity ratios also indicate how well the company is being managed.
