Syllabus C. Working Capital Management C2b. Accounting ratios

Sales to Working Capital 7 / 7

Sales Revenue/Net Working Capital Ratio

Explanation of Sales to Working Capital:

  • The Sales to Working Capital ratio measures how well the company’s cash is being used to generate sales.  

    Working Capital represents the major items typically closely tied to sales, and each item will directly affect this ratio.

Importance of Sales to Working Capital:

  • An increasing Sales to Working Capital ratio is usually a positive sign, indicating the company is more able to use its working capital to generate sales.

  • Although measuring the performance of a company for just one period reveals how well it is using its cash for that single period, this ratio is much more effectively used over a number of periods.

  • This ratio can help uncover questionable management decisions such as relaxing credit requirements to potential customers to increase sales, increasing inventory levels to reduce order fulfillment cycle times, and slowing payment to vendors and suppliers in an effort to hold on to its cash.

Additional ratio points

  1. If comparing between years , it is fine to use balance sheet (year end) figures instead of averages.

  2. 'Turnover' ratios are the ‘day’ ratios inverted. (Do not multiply by 365)

  3. Limitations of ratios are - y/e figures may not be representative, they can be manipulated, they are historic and ca be distorted by inflation.