IMPORTANCE OF WORKING CAPITAL RATIOS
Financial Executives check the efficiency of the working capital used by the firms with the help of Ratio Analysis. To measure the efficiency of the working capital, some of the important ratio are given below: -
Total Current Assets is divided by Total Current Liabilities
It is the relationship between the amount of current assets and the amount of current liabilities. It measures the short-term liquidity position of the firm.
Total Current Assets-Inventories is divided by
Total Current Liabilities
Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.
Working Capital Turnover Ratio
Sales is divided by Working Capital
A Higher Working Capital Ratio means lower investment in working capital and better profitability.
Stock Turnover Ratio (in days)
Sales is divided by Inventory
On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management.
Current Assets Turnover Ratio
Sales is divided by Current Assets
It reflects the efficiency in generating sales by Current assets.