The activity ratio shows how quickly a company can turn their inventory or what they sell into cash or sales. A company almost always wants to convert what it sells into cash because this leads to higher revenues and less expenses. I value this ratio very highly because it shows whether or not a company can sells thing with ease. If a company can't sell something with ease it means that they will incur more expenses in both time wasted and services bought to sell their goods. In other words if I have a company that people just love, and I DON'T have to advertise or hire sales people since people just flock to my business and spend their money, I should have a high activity ratio, plus an advantage in the market against my competition.
One thing too look for when trying to find companies that have a high AR, and the most important one of all, is simply the price charged for most the goods sold. Companies that can charge less for their products and get away with it are subject to high liquidity and thereby their inventory is turned to cash very rapidly. It has been long known that companies that can change price up or down slightly and not lose their liquidity have a great advantage and a better company in the marketplace. There are many companies like this especially if their products rely on addictions or habitual practice. One of the industries that I can think of right away is the video game industry. The video game industry has habitual players that will not only pay a lot for games but it can also RAISE prices in order to generate more revenue without seriously damaging the sales and thereby adding more cash to the inventory they sell.
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