Activity and profitability ratios help us in analysing the performance and measuring the efficiency of the company. Profitability ratios are also known as income ratios. They help in analysing the earning capacity of the business. Gross profit ratio shows the relationship between gross profit and net revenue from operations. Higher the ratio better it is. It measures the margin of profit available on revenue from operations, checks the adequacy of selling price and shows efficiency of trading activities. Net profit ratio shows the relationship between Net profit and revenue from operations. This ratio shows overall efficiency of the business and checks operational efficiency of the business. Operating ratio shows relationship between operating cost and net revenue from operations. Lower the ratio better it is. It helps in determining the increase or decrease in cost as compared to revenue from operations. Operating profit ratio shows relationship between operating profit and revenue from operations. Higher the ratio better it is. Return on investment measures overall efficiency of the business.
Activity or Turnover Ratio measures how well the facilities at the disposal of the concern are being utilised. Inventory Turnover Ratio shows efficiency with which inventory is converted into revenue from operations. Higher the ratio better it is. Working Capital Turnover ratio shows how effectively the working capital has been utilised in making revenue from operations. Trade Receivables Turnover Ratio shows relationship between credit revenue from operations and average trade receivables. Average collection period shows the average period for which credit sales remain outstanding. Trade Payables turnover Ratio indicates relationship between net credit purchases and average trade payables. Average payment period shows the period which is normally taken by the firm to make payment to its trade payables.