Published: 03rd Oct 2024
By: Value Research
Working capital is the backbone of a company’s daily operations. It’s what keeps the gears turning—from paying suppliers to covering day-to-day expenses. But how do you know if a company is using its working capital efficiently? Let’s dive into 5 key ratios!
This ratio tells you if the company can cover its short-term obligations. It is calculated by dividing current assets by current liabilities. Current assets should be double the liabilities i.e., a ratio of 2 or above is ideal.
It indicates how frequently the company replaces its inventory. It is calculated by dividing sales by average inventory. A higher turnover ratio is ideal, as it suggests good sales or high demand. The ratio mostly applies to manufacturing companies & excludes sectors like BFSI, services, real estate, and others.
It reflects how often the company collects payments from customers. A high ratio suggests quick collections or fewer debtors, but might also indicate stricter credit terms. Remember, in competitive markets, flexible credit is ideal to lure customers.
Companies often buy raw materials on credit. This ratio tells us how fast a business pays its suppliers. A higher ratio means prompt payments and ample cash. A continuous falling ratio may signal increasing creditors or delayed payments.
This is a crucial one! It measures how long it takes to convert inventory investments into cash. The shorter, the better. To calculate it, add receivable days to inventory days and subtract payable days. Our full story explains each ratio with real examples and a detailed analysis. Read it from the link below