# Activity Ratios: Definition, Formula, Uses, and Types

> **Definition**
>
> Several activity ratios are used to measure a company's success in turning its assets into revenue, such as its efficiency in converting inventory into sales.

## What Is an Activity Ratio?

Stock analysts examine several activity ratios that indicate how efficient a company is at turning its assets into revenue. Commonly referred to as efficiency ratios, they help analysts gauge how a company handles [inventory management](https://www.investopedia.com/terms/i/inventory-management.asp), which is key to its operational fluidity and overall fiscal health.

There are several categories of activity ratios related to accounts receivable, inventory turnover, return on equity, and asset turnover.

### Key Takeaways

*   Activity ratios are used to compare the relative efficiency of companies in the same industry.
*   They also are monitored over time to indicate whether a company is getting more efficient or less.
*   Each of these ratios measures a company's effectiveness in using its assets to produce revenue.

![Activity Ratio](https://www.investopedia.com/thmb/OzQjfX5Tx-_pCBDz5e5xHq-XcS8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ActivityRadio-963331ba1c9943d3b00dbd12fb46f2a0.jpg)

*— Xiaojie Liu / Investopedia*

## Understanding Activity Ratios

Activity ratios are most useful when employed to compare two competing businesses within the same [industry](https://www.investopedia.com/terms/i/industry.asp), 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:

### Accounts Receivable Turnover Ratio

The [accounts receivable turnover ratio](https://www.investopedia.com/terms/r/receivableturnoverratio.asp) 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.

### Merchandise Inventory Turnover Ratio

The merchandise inventory turnover ratio measures how often the [inventory](https://www.investopedia.com/terms/i/inventory.asp) balance is sold during an [accounting period](https://www.investopedia.com/terms/a/accountingperiod.asp). The [cost of goods sold (COGS)](https://www.investopedia.com/terms/c/cogs.asp) is divided by the [average inventory](https://www.investopedia.com/terms/a/average-inventory.asp) for a specific period. Higher calculations suggest that a company can move its inventory with relative ease.

### Total Assets Turnover Ratio

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.

### Return on Equity

A performance metric known as [return on equity (ROE)](https://www.investopedia.com/terms/r/returnonequity.asp) measures the revenues raised from shareholder equity. ROE is calculated by dividing net income by all outstanding stock shares in the market.

### Asset Turnover Ratio

A metric called the [asset turnover ratio](https://www.investopedia.com/terms/a/assetturnover.asp) 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 Ratios

Activity ratios and [profitability ratios](https://www.investopedia.com/terms/p/profitabilityratios.asp) 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](https://www.investopedia.com/terms/p/profit.asp). 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.

## When Are Activity Ratios Most Useful?

Activity ratios are most useful when they compare two competing businesses within the same industry, to determine how a particular company stacks up among its peers.

## What Are Activity Ratio Subcategories?

Activity ratio subcategories, described earlier in this article, are:

*   Accounts receivable turnover ratio
*   Asset turnover ratio
*   Merchandise inventory turnover ratio
*   Return on equity
*   Total assets turnover ratio

## How Does an Activity Ratio Differ From a Profitability Ratio?

An activity ratio measures how well a company utilizes its resources to generate those profits, while a profitability ratio depicts a company’s profit generation.

## The Bottom Line

An activity ratio, commonly called an efficiency ratio, indicates how efficiently a company is leveraging the assets on its [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp), to generate revenues and cash. It is a type of financial metric, and it helps analysts gauge how a company handles inventory management.