How Securities are Priced in the Primary Market
We already know that primary financial markets are used by firms to raise funds from investors. This is done by issuing shares via an initial public offer, rights issue, or even using private placements. In each of these cases, the firm selling shares has to arrive at a market price at which they are willing […]
Hedge Funds and Leverage
Leverage is one of the defining features of any hedge fund. Therefore hedge funds have gained expertise in the creation and utilization of leverage. Not only do they use traditional means like equity and fixed income leverage but they also use create leverage with the help of futures, options and swaps. In this article, we […]
Pandemic Bonds
The recent coronavirus pandemic has fundamentally changed the way in which individuals, organizations, and even nations manage their finances. Most people around the world now know about the devastating effects that a pandemic can have on the overall economy. This is the reason that they want to be financially prepared for such emergencies. Many different […]
Issues With Merchandising
In the previous article, we have already studied what merchandising is. We now know why it is an important source of revenue for the sports team. We also know how the business of merchandising is conducted and what are the benefits of the same. However, it needs to be understood that there are a lot […]
How Bankruptcy Affects Personnel Contracts
When a firm declares bankruptcy, this decision has an impact on all the contracts signed by the firm. The law forces the firm to complete its performance in case of some contracts. On the other hand, the firm has the option to opt-out of some contracts. One such category of contracts is called employment contracts. […]
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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