The Green Shoe Option in Investment Banking
In many cases, IPOs are thought of as being underpriced. This means that as soon as the IPO is listed in the market, investor demand appears, and as a result, the price of the newly listed shares goes up. This is the situation that the issuing company, as well as the investment banker, wants to […]
Understanding Tax Terminology: Tax Rates
In the previous article, we discussed about how tax base calculations work. However, tax base calculations are just one part of the story. The other part of the calculation is the tax rate. Tax base and tax rate are multiplied to arrive at the tax amount owed by the organization. In this article, we will […]
Follow On Public Offer
The common perception is that companies need to cultivate relationships with investment bankers only if they are unlisted and need to go public. It is believed that once they have already gone public, the services of investment banks have limited utility for these firms. However, that is not true. There are many already listed companies […]
How a Recession Will Impact Pension Funds?
The post-pandemic economic environment across the world has bearish undertones. During the pandemic, many countries had lowered their interest rates to unsustainable levels. As a result, they are now witnessing record inflation numbers. The central bankers across the world have started tightening the monetary policy. This means that the risk-free interest rates are likely to […]
Challenges Facing Pension Fund Governance
Pension funds are large investment funds that control trillions of dollars worth of investments worldwide. Pension funds exist in almost every important economy of the world. Hence, pension funds are controlled by many different types of regulators. Despite this heavy policing of the activities of pension funds by regulatory bodies, they still face a lot […]
Working Capital to Sales Ratio = Working Capital / Sales
Stating the working capital as an absolute figure makes little sense. Consider two companies, both having the same working capital of USD 100. While one company uses this working capital to generate sales of USD 500, the other uses the same amount as working capital to generate USD 1000 in sales. Which one do you think will be more profitable? Which one do you think is more efficient?
When companies use the same working capital to generate more sales, it means that they are using the same funds over and over again. This is why this ratio is also called “Working Capital Turnover Ratio” as it measures the number of times working capital has been turned over. The higher the sales, the more the profits and therefore the more appropriate use of working capital has been made.
The working capital to sales ratio uses the working capital and sales figures from the previous year’s financial statements. Hence, there is obviously an assumption that working capital and sales have been accurately stated. Companies may over stock or under stock because of expectations of shortage of raw materials. These influences are however short term. Thus while reading this number the analyst must compare it with the past numbers to see if this is usual state of affairs for the company or whether this is an exception.
These investors may be true because the stock market takes any news of cash shortage very seriously and the stock plummets in the market. But the price in the stock may be short term.
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