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IMPORTANCE OF WORKING CAPITAL RATIOS

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: - 

RATIOS
Formula
Result
Interpretation
Current Ratio
Total Current Assets is divided by Total Current Liabilities
=X times
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.
Acid-Test Ratio
Total Current Assets-Inventories is divided by 
Total Current Liabilities
=X times
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
=X times
A Higher Working Capital Ratio means lower investment in working capital and better profitability.
Stock Turnover Ratio (in days)
Sales is divided by Inventory
=X days
 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
=X times
It reflects the efficiency in generating sales by Current assets.