Working Capital Turnover Ratio = Revenue ÷ Average Working Capital What is a Good Activity Ratio?Īs a general rule of thumb, the higher the turnover ratio, the better - since it implies the company can generate more revenue with fewer assets. The formula to calculate the total asset turnover ratio, fixed asset turnover ratio and working capital turnover ratio – three of the more common activity ratios – are as follows.
Activity Ratio FormulaĮach activity ratio consists of revenue in the numerator and then a measure of an asset(s) in the denominator. Therefore, by comparing the two sides - revenue and an asset metric - each “turnover” ratio measures the relationship between the two and how they trend over time. One can gauge a company’s ability to manage its current assets such as inventory and accounts receivable (A/R) as well as its long-term assets, or fixed assets (PP&E), to generate more revenue. In theory, the underlying objective of a well-managed company is to derive as much revenue as possible using the least amount of resources, which often establishes an economic moat.Ī “moat” refers to a sustainable competitive advantage that protects a company’s long-term profits and existing market share from external threats.
#Fixed asset turnover calculator how to#
How to Calculate Activity Ratio (Step-by-Step)Īn activity ratio, or asset utilization ratios, determines the efficiency at which a company utilizes its assets, and is an indicator of how efficient a company is at asset allocation. An Activity Ratio is a measure of operating efficiency, with regard to a company’s capacity to utilize its asset base to generate revenue.
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