An Introduction to Hedge Funds
The term “hedge funds” have become ubiquitous in the financial markets nowadays. This is a term which incites a strong emotional reaction from all market participants and observers. Some are of the opinion that these funds are evil and endanger the entire market with their reckless risk taking. Others are of the opinion that hedge […]
Equity to Fixed Assets Ratio – Meaning, Assumptions and Interpretation
Formula Equity to Fixed Assets Ratio = Equity / Total Fixed Assets Equity includes the retained earnings Total Fixed assets excludes intangible assets of the firm Meaning The “equity to fixed assets” ratio shows analysts the relative exposure of shareholders and debt holders to the fixed assets of the firm. Thus, if the “equity to […]
The Components of an Investment Bank
As mentioned earlier, investment banks have been in operation for several years now. This is the reason why, for many years, they have been involved with almost any deal which includes large sums of money. The operations of investment banks have become very diverse over the years. This is the reason that investment banks are […]
What is Book Building – The Book Building Process
Whenever a company wants to sell its shares in the open market, it faces a very important question. The question is that what should the price of the shares being sold be? Over the years, investment bankers have tried multiple ways to find out the fair price at which the shares should be sold. Many […]
Going From Financial Goals to a Financial Plan
The process of financial planning is a bit more organized compared to the traditional saving and investing approach. During financial planning, a comprehensive plan is created in such a way that the needs and goals of the individual are met at each stage. Hence, the financial plan of every individual is unique since it is […]
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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