3.1 Activity Ratios Flashcards
What to Activity Ratios Measure?
How fast Receivables and Inventory are converted to cash
Inventory Turnover
Cost Of Good Sold/
Average Inventory
High Number can indicate strong sales (high COGS without higher inventory). Or a lowering of Inventory Levels
Low Number can mean High Inventory levels
DSI (Days Sales in Inventory)
Days in Year/
Inventory Turnover
Days Sales tied up in Inventory
Accounts Payable Turnover
Purchases/
Average Accounts Payable
The efficiency firm manages payables
If you carry more payables, you turn less.
If you pay too fast, you get more turns (or maybe are taking advantage of discounts)
Days Purchases in Accounts Payable (DPAP)
Days in Year/
Accounts Payable Turnover
Average Days to Settle a Payable
*compare to Terms to see if paying too quickly.
Accounts Receivable Turnover
NET credit Sales/
Average Accounts Receivable
High Turnover maybe customers are paying timely
Lower = slow (no discounts)
DSO AR (Days Sales in Accounts Receivable)
Days in Year/
Accounts Receivable Turnover
Net credit sales/
Average Accounts Receivable
High = improved collections
OPERATING CYCLE
DSO AR + DSI
Days sales in Accounts Receivable + Days Sales in Inventory
The time between purchase of Inventory and Collection on the sale of that inventory
Cash Cycle
Operating Cycle - Days Purchases in AP
it is the period when the Company DOES NOT have Cash.
Days purch in AP is when it DOES have cash (since AP is not Paid yet)
Working Capital Turnover
Sales/
Working Capital
How efficiently a company is using Working Capital to generate sales.
Fixed Asset Turnover Ratio
NET Sales/
AVERAGE Fixed Assets
How effective is the company deploying its assets
Can be effected by Capital Intensiveness, Depreciation Method, Age of Assets
Total Asset Turnover
NET Sales/
Average Total Assets
Effective use of Total Assets
Ratio Analysis (In General)
To Analyze:
Financials, judge efficiency, locate weakness, compare performance
Not useful unless they can be compared
- Industry Norms
- Aggregate Economy
- Past Performance
Can be used to identify specific weaknesses even though firm as a whole is OK
Weakness of Ratio Analysis
- SIZE differences
- Manipulation
- Conglomerates
- Accounting Estimates
There is incentive to Window Dress to improve results
Also doesn’t include implicit cost to get economic profit
Economic Profit
Revenues
- Explicit Costs
- Implicit Costs
