Activity Ratios
Categories: Accounting, Metrics, Company Management
Fatman Pants has an enormous balance sheet. (Bob Fatman just liked to save his cash from day 1 when he started the company 40 years ago.) So Fatman has $5 billion in cash assets on its books. But this year it had $100 million in sales. That's an activity ratio of only 100/5,000, or 2%.
That is, Bob only converted 2% of his cash assets into sales. Very poor ratio, in that you'd think he could be doing a lot more with his assets. Launching new pants products, opening new markets, buying competitors, building better machinery, etc. There should be some correlation between assets and sales, even though that mapping isn't an obvious or direct one. The analysis is kissing cousin to ROA, or Return on Assets, where "Return" there is just the profits that the horde of assets brings, instead of, in this case, the numerator being Sales.
See Inventory Turnover if you really want to get into the nitty gritty.