Financial Ratios to Evaluate Working Capital Management

● SOLVENCY RATIOS:

1. Working Capital: provides a quantification of readily available resources. Ratio not to be less than 2. Aggressive policy: Low ratio, Conservative policy: High ratio.

= current assets - current liabilities           

2. Current Ratio: provides a measure of short-term debt-paying ability.

= current assets / current liabilities            

3. Quick Ratio 'Acid-Test': provides a stricter measure of short-term debt-paying ability, measures immediate short-term liquidity

= (cash, temp invest, marketable securities, net receivables) / current liabilities             

4. Current Cash Debt Coverage Ratio: measures a company's ability to pay off its current liabilities in a given year from its operations.

= net cash by operating activities / avg current liabilities

● ACTIVITY RATIOS:

1. Accounts Receivable Turnover: provides a measure of the relative size of the AR balance and the effectiveness of credit policies.

= net credit sales / average accounts receivable 'net'.           

2. Inventory Turnover: measures the relative size of your inventory. High ratio means: firm not hold excessive stock of unproductive inventories & inventory is marketable.

= cost of goods sold / average inventory 

3. Asset Turnover: measures how efficiently all assets are used to generate sales

= net sales / average total assets

4. Average Collection Period: measures the average time taken to collect your A/R

= 360 / accounts receivable turnover       

5. Number of Days' Sales in Inventory: provides an idea of how long it takes to sell the entire inventory. Lower number is better.

= 360 / inventory turnover

6. Operating Cycle: the time between inventory acquisition and cash of sales receipt

      = number of days of inventory + number of days of receivables