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The important activity ratios are:
1
. Inventory Turnover Ratio2. Debtors Velocity Ratio3. Creditors Velocity Ratio4. Assets
Turnover RatioCost of Goods SoldInventory Turnover ratio = x
1
00Average InventoryHowever, it can also be expressed in terms of so many months, weeks
or days holding. In this case it can be calculated as
follows:Average Inventory x No. of Months\weeks\Days in a year Cost of Goods Sold
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Uses of inventory turnover ratio
This ratio indicates the number of times the average stock of finished goodsis turned over or sold
during a year. It also indicates the extent of overstocking or under stocking of finished goods and
the presence of non moving stock.It helps to determine even the liquidity of a concern as it
indicates the rate atwhich stock is converted into sales and then into cash. (The stock turnover of
8
times a year is considered ideal
)
.
Debtors Velocity Ratio
Net Annual Credit SalesDebtors velocity ratio=Average Debtors (Debtors and Bills Receivables
Uses:
This ratio indicates the rate at which amounts are collected from debtors. Itindicated even the
liquidity of the concern. The average realization period of the business unit is being expressed in
terms of number of sales (credit
)
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Creditors Velocity Ratio
Net Annual Credit purchasesCreditors velocity ratio=Average Creditors (Creditors and Bills Payable
)
Uses:
This ratio indicates the rate of which creditors are being paid by the unit i.e.average payment
period is expressed in terms of number of days purchases(credit
)
.
Assets Turnover Ratio
Net Sales

1
. Fixed asset turnover ratio =(Ideal 5 times
)
Fixed Assets

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RATIO ANALYSISDefinition of ratio
Ratio is a wealth immaterial expression showing relationship between the items of the financial
statement
Definition of ratio analysis
Ratio analysis is a widely used tool financial analysis. It is a defined as thesystematic use of ratio
interact the financial statement so that the strength or weakness of a firm as well as it historic
performance and current financialconditions can be determined.
Advantage of ratio analysis:
1)
Ratio analysis simplified the understanding of financial statement2
)
It is a device to analyze and interpret the financial of the enterprise3
)
Ratio facilitates inter firm and intra firm comparison, their by bringing out thestrength weakness and
efficiency of the firm4
)
Ratios makes its possible to estimate the other figure is known5
)
Investment decision can at times be based on the conditions revealed by ratios

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Limitations of the ratio analysis:
While ratios are compared on a historical basis, though the time periods may be of equivalent
duration, the price level changes between the periods which may distortthe result if no
allowances is made for this factor.Since analysis is made on the basis of financial statement, this will have all
thelimitations such as window dressing, improper valuation of assets, inclusion of value of
fiction assets etcThere is no reliable way of the measuring the profit potential of business so as
tocompare the reported profit with the profit that could have been earned under
thecircumstances. Nevertheless, ratio analysis is a useful too and could be used along with

other quantitative techniques in financial management to assess the financial health of

anorganization.
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Classification of Ratio Analysis
The third step in analysis and interpretation of balance sheet is to calculate variousratios. The
various ratios can broadly classify into four categories namely:
1)
Profitability Ratio2
)
Liquidity Ratio3
)
Leverage Ratio4
)
Activity Ratio
A) Profitability Ratio
These ratios indicate whether the business has utilized the resources profitability.The important
profitability ratios are:Gross profit
1
. Gross profit ratio = x
1
00Gross collection
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Net profit2. Net profit ratio = x
1
00Gross collectionOperating cost3. Operating ratio = x
1
00Gross collectionOperating profit4. Operating profit ratio = x
1
00Gross collectionProfit before interest &tax5. Return on investment ratio = x
1
00Capital employedCapital employed = net fixed assets + total current asset