Working capital ratios

Liquidity ratios

Financial managers use liquidity or WC ratios to control and monitor WC

Current ratio

Current assets / current liabilties

A current ratio of less than one could indicate liquidity problems

There is a general target of 2:1, the acceptability of the ratio will depend on the nature of the business and how it compares with those of a similar type

Quick ratio / acid test

Current assets - inventory / current liabilities

The quick ratio excludes inventory which cannot easily and quickly be converted into cash

The general target is 1:1, an ideal ratio depends on industry practice

Efficiency ratios

Efficiency ratios measure how efficiently a company uses its assets to generate revenue and manage its liabilities

Asset turnover

This measures the ability of a company to generate sales or revenues from its assets

Revenue / net assets or total assets

Inventory turnover

Measures the effectiveness of inventory management

Indicates how quickly inventory is being sold or used during the period

annual cost of goods sold / inventory

Trade receivables collection

Trade receivables * 365 / revenue/credit sales

Measures how quickly customer debts are being collected

Trade payables payment

Measures how quickly trade payables are being paid

trade payables * 365 / cost of goods sold / credit sales