Reading: Activity Ratios
7. Summary
The previous sections have introduced the most prominent ratios to assess how efficiently the firm manages its receivables, payables, inventory, and overall assets.
It is important to note that these ratios alone have very little meaning. Only when comparing them over time or accross firms will we be able to extract valuable management information from these ratios.
It is equally important to be careful when interpreting the ratios. The interpretations we offered in the previous section were generally "all-else-the-same" interpretations. That is, we have assumed, for example, that a firm could change its credit or inventory policy without affecting sales.
That is typically not the case in the real world. For example, customers might be reluctant to purchase from the firm if the credit terms are less than 30 days. Or the firm might miss out on attractive business opportunities if it lacks the inventory to quicky service its customers.