Question

Internal management, assessing the firm’s current strengths and weaknesses. Would you agree that the most valuable ratio for internal management would be activity? Explain the reasons

Answer 1

Activity ratios measure how the firm has managed to use its resources well and also the efficiency of the company on various fronts. Activity ratios are measured through accounts receivable ratio, inventory turnover ratios , accounts payable ratio among others. Activity ratios certainly play an important role in the internal management of the company since it is the most effective way to understand the management's use of resources and returns generated through the same. However, these ratios is not the mean and end in itself to analyze the company's performance. The reason being ratios have to be analyzed under all sections to thoroughly understand the financial position and internal management than alone focus on one set of ratios. For instance, current ratio may be indicative of how well the company is managing its working capital which is an important liquidity measure but is not covered under activity ratios.