Can Brick and Mortar Stores Compete with Amazon?
Amazon has become the poster-child of the e-commerce growth story across the world. For many years, retail executives across the globe have been nervously watching Amazon capture a bigger share of the pie each year. Doomsday scenarios are often predicted in media and by political pundits. However, the reality is that the situation is not […]
Is the Lyft IPO Overpriced?
Lyft is one of the most famous tech unicorns in the world. There was tremendous amount of buzz in the market regarding the Lyft IPO. This is the reason that the company has been able to garner a valuation of close to $24 billion. This astronomical valuation is despite the fact that the company has […]
The “Rich Dad Poor Dad” Philosophy
The domain of personal finance is exceptionally wide. There are lots of experts who have differing opinions, who coexist in the personal finance arena. However, in the early 2000s, a relatively unknown author by the name of Robert Kiyosaki started making waves in this area. Some of the ideas that he suggested were radically different […]
How Do Pension Funds Influence Economic Growth?
Pension funds have witnessed a dramatic increase in the number of assets that they control. This increase has been the result of an ever-increasing workforce that has been diligently contributing to their financial future. The funds being managed by pension funds have increased both in developed as well as developing nations. Many developing nations are […]
Managing Revenue Risks in an Infrastructure Project
Equity and debt are the most commonly used sources of funding when it comes to infrastructure financing. However, in many cases, revenue is also an important source of funding. This is because, in many cases, revenue from previous phases of the project is used to fund the construction of newer phases of the project, thereby […]
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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