How is the activity ratio calculated?

The activity ratio, often referred to in the context of assessing how efficiently a company utilizes its assets to generate sales, is calculated through the process of dividing sales per day into current receivables. This method provides insight into how quickly a company can convert its accounts receivable into cash, reflecting the efficiency of its revenue collection processes.

When sales are divided by current receivables, it reveals the number of days it takes, on average, to collect payment after a sale is made. This measurement is significant for businesses as it helps assess liquidity and operational efficiency. An increased activity ratio indicates better performance in terms of receivables management, suggesting that the company is quicker in turning its receivables into actual cash flows. Understanding this ratio plays an essential role in financial analysis and cash flow management.