Think of Activity Ratios (also called Turnover Ratios) as a speedometer for your business. They don't tell you how much you have — they tell you how fast you're using it. If Rajesh & Co. Pvt. Ltd. holds ₹20 lakhs of inventory, the real question is: are they selling it in 30 days or letting it sit for 180 days? That speed is what these ratios measure, and it directly impacts liquidity and profitability.
There are six key ratios you must know cold for the exam. Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory. A higher ratio means faster stock movement — good. Pair this with Inventory Holding Period (365 ÷ Inventory Turnover) to get days of stock held. Debtors Turnover Ratio = Net Credit Sales ÷ Average Trade Debtors. It tells you how quickly customers pay. Convert it to Debtors Collection Period (365 ÷ Debtors Turnover) — if this is 90 days for a business with 30-day credit terms, collections are badly delayed. On the flip side, Creditors Turnover Ratio = Net Credit Purchases ÷ Average Trade Creditors, and Creditors Payment Period = 365 ÷ Creditors Turnover shows how long you're taking to pay suppliers. A longer payment period is actually favourable — free short-term financing. Fixed Assets Turnover = Net Sales ÷ Net Fixed Assets measures how efficiently plant and machinery generates revenue. Finally, Working Capital Turnover = Net Sales ÷ Net Working Capital shows how hard every rupee of working capital is working.
This is examined frequently as a 4–8 mark question, either as standalone ratio calculations or as part of a comparative/trend analysis case. The examiners love giving you a mix of data and asking you to compute 4-5 ratios and interpret them — so don't just memorise formulas, understand what a high or low ratio signals for the business. Always use average figures (opening + closing ÷ 2) for balance sheet items like inventory and debtors when both figures are available.