7/23/2019 Activity Ratio

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Activity Ratio

Inventory turnover ratio, it is the ratio of the company which calculate the eciency

at which the company is able to completely sell its goods and restore the inventory

batch again in a given time period. In this care we are trying to compare the two

ecommerce giants amazon and ebay, but the problem here is they both follow

completely dierent kind of business model. In ebay they dont have the concept of

inventory storage so we will be comparing the activity ration of the amazon with its

previous records. Another ratio that comes under activity ratio is to ays !ales of

Inventory, which is basically the inverse of the inventory turnover ratio and again

we will be comparing it with the previous years records.

"he formula to calculate inventory turnover ratio is#

Inventory Turnover = cost of goods sold / average

inventory

$hen we were calculating the Activity ratio for amazon we didnt %nd any trend as if

increasing or decreasing. &rom year '()) to '()' it has increased and the days

sales of inventory has decreased as the two ratios has the inverse relation and from

'()' to '()* the inventory turnover ratio has decreased and the days sales of

inventory has increased.

Inferences can be drawn from the inventory turnover ratio, if the ratio is high is

good for the company which indicates ecient inventory and sales management

and we may also conclude that it can e+perience freuent stock outs. A low ratio on

the other hand indicates longer inventory holding which carries the risk of inventory

damage.

Days sales outstanding# It is used to calculate the average collection period of

the accounts receivable, it is an indicator of how well the accounts receivables are

being managed by the company. It gives us the relationship between the accounts

receivable and the credit sales of the company. $e are comparing here two

ecommerce giants with the entirely dierent business model.

Days sales outstanding = Accounts receivable/

(annual sales/365)-ere we have observed that because of the entirely dierent business model the

ratios of the two companies are very dierent. !ome data to support the facts, in

'()* the ! for amazon was '*.*/ and for the ebay was '01.2), since amazon

stores the inventory and sells it after receiving the order from customer its !

ratio is small. It can be said that Amazon is less risk averse than 3bay. -igher !

can also cause cash 4ow problems.