Activity or Working Capital Efficiency Ratios Term Paper

Activity or Working Capital Efficiency Ratios - Term Paper Example Activity ratios are operating efficiency measures, which determine the ability of a company to maximize its output given a certain level of resources. These ratios significantly gauge the asset, investment, and cost management performance of the business entity. Ratios under this category are inventory, creditors’ and debtors’ ratio. The inventory ratio measures the number of days the inventories stay in the company’s distribution center or warehouses. The debtors’ ratio reveals the efficiency of a business organization in collecting its account receivables while creditors’ ratio shows the number of days the company is able to pay its suppliers. Lower numbers are typically preferred in this ratio classification as they signify speed and efficiency of the business organization in dealing with its different transactions.             Appendix 3 shows the working capital efficiency of HR Owen Plc and Antonov Plc. It should be noted that in general, HR Owen is able to boost its efficiency as indicated from the improvement of its inventory and trade creditor ratio. The company is able to reduce the number of days the stocks sit on its warehouse from 84 to 65. HR Owen is also more responsible for its debts it is able to pay its trade creditors in just 12 days. However, HR Owen should still concentrate on its efforts of collecting its receivables from customers. The company reports that it became relatively slower I collecting receivables by three days compared to the 12 days recorded in 2004. The performance of Astronov is again inferior to HR Owen evidenced by its higher debtor’s ratio. The other ratios cannot be computed as the company does not record revenue and cost of sales for the periods considered. Liquidity or solvency ratios are used as measures of the company’s ability to finance its short-term obligations by its cash and near-cash items. Included in these ratios are the current and acid test or quick ratios. Current ratio expresses the â€Å"working capital’ relationship of current assets available to meet the company’s current obligations.†