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CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Which one of the following ratios is classified as an activity (turnover) ratio rather than a liquidity or profitability ratio?

Debtors turnover ratio is an activity ratio because it shows how efficiently a firm collects receivables relative to credit sales. Quick ratio measures liquidity, net profit ratio measures profitability, and interest coverage measures the ability to service debt, so those three belong to other categories.

  1. AQuick ratio
  2. BDebtors turnover ratioCorrect
  3. CNet profit ratio
  4. DInterest coverage ratio

Explanation

Activity ratios measure how efficiently assets are used. Debtors turnover (credit sales / average debtors) is an activity ratio. Quick ratio is a liquidity ratio, net profit ratio is a profitability ratio, and interest coverage is a coverage (solvency) ratio.

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