Indicators of activity

Last updated: 25.03.2016

Activity indicators evaluate the efficiency of the company in the use of its assets. They evaluate in particular how long the property holds its form, but it converts into sales or cash and turnover rate.

 

If the company holds:

  • too much assets → inefficiency; in addition, the assets must be financed somehow, so the company pays "unnecessary" interest
  • too little assets →  the company may not be able to meet the customer´s demands within the agreed deadlines or respond to new market opportunities

the company should find a reasonable compromise

 

Disadvantages of activity ratios:

  • valuation of assets and prices at which assets were acquired has a great influence (various purchase prices)
  • it compares various assets from balance sheet, which is a fixed variable and the indicators of profit or loss (mostly sales), which is the sum of transactions over the entire period of time (usually a year). For this reason, balance sheet entries are often calculated as the arithmetic average of the beginning and end of the period and exclude the items that could not to have an impact on the income statement.

 

The indicators are divided into two mutually inverse groups:

  • turnover period, i.e. how long the property holds its form, before it is converted into sales or cash. These indicators should be as low as possible.

calculation: selected asset or liability / revenue or costs * number of days in the year (360/365)

 

  • turnover ratios, i.e. number of cycles during a period of time (usually 365 or 360 days). The higher are these indicators, the better.

calculation: sales and costs / selected asset or liability

calculation from turnover period indicators: 365 / given indicator of turnover period

 

Interpretation: important is trend.

 

Indicators of activity are:



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