What do activity ratios address?

Activity ratios focus on how effectively a company utilizes its assets to generate revenue and manage operations. These ratios measure the efficiency of a business in turning its resources into sales or income. For instance, ratios like inventory turnover and accounts receivable turnover provide insights into how quickly a company can sell its inventory or collect on receivables, respectively. By evaluating these metrics, stakeholders can assess the operational efficiency of the business and how well it is performing relative to its available resources.

While liquidity ratios assess a firm's capacity to meet short-term obligations, and profitability ratios gauge the success in generating profit from investments, none of those focus specifically on the operational efficiency aspect that activity ratios do. Additionally, return on equity is a measure related to profitability rather than the level of operational activity of the business. Therefore, the emphasis on assessing the level of activity relative to operational efficiency distinctly characterizes activity ratios.