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