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10

Net Working Capital Ratio

This is a complete guide on how to calculate Net Working Capital (NWC) ratio with detailed interpretation, analysis, and example. You will learn how to use its formula to evaluate an organization's liquidity.

What is Net Working Capital Ratio (NWC)?​

The amount of money, or assets, that a company has on hand at any given time to run its daily operations is called its working capital.

Also known as its net working capital, this money is only considered to be available when it’s in excess of what the company currently owes in terms of debt.

So what is included in working capital?​

You can determine the working capital (WC) for any business by using the following formula:

working capital formula

In essence, when you’re studying a company’s financial standing as a potential investment, the amount of its net working capital can help to give you a current picture of both its level of operational efficiency, and its short-term financial health.

Without maintaining a positive level of working capital on an ongoing basis, a business could run into problems funding its current debts.

Ideally, you’ll want to compare the net working capital from period to period, in order to develop an idea of how proficiently a business is being run.

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8

Sales to Working Capital Ratio

This is an advanced guide on how to calculate Sales to Working Capital ratio with thorough interpretation, example, and analysis. You will learn how to use its formula to evaluate a firm's liquidity.

What is Sales to Working Capital Ratio?​

The sales to working capital ratio is another useful liquidity ratio that defines the relationship between a company’s revenues, and the amount of cash it holds in the form of inventory and receivables.

Because it will show you the amount of invested cash a company requires to maintain a certain level of sales, as an investor you can use the sales to working capital ratio to analyze any changes in an organization’s use of its cash over a period of time.

In general, the amount of working capital available to a business for its daily operations is reduced when its sales to working capital ratio is lower, since it means that more of the company’s money is tied up in receivables and inventory.

In an ideal world, a company’s sales to working capital ratio should remain fairly constant regardless of its sales levels.

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12

Sales to Current Assets Ratio

This is a complete guide on how to calculate Sales to Current Assets ratio with detailed interpretation, analysis, and example. You will learn how to use its formula to assess a company's liquidity.

What is Sales to Current Asset?​

The sales to current assets ratio is a financial calculation that can help you determine how efficiently a company is making use of its current assets to generate revenue.

Current assets in this case would include the combined total of cash, marketable securities, receivables, inventory, and any prepaid expenses.

The sales to current assets ratio will give you the most meaningful measure of liquidity when it’s used to analyze businesses that hold a significant amount of inventory.

Because this ratio value can vary widely, the comparison of net sales amounts with current assets is best used to spot trends over a number of accounting periods for the same company, or to compare multiple companies within the same industry.

In general terms, when the value of the sales to current assets ratio is high, a company is supporting its business income with very few assets.

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6

Quick Ratio

This is an ultimate guide on how to calculate Quick Ratio with detailed analysis, interpretation, and example. You will learn how to utilize this ratio's formula to assess a business liquidity.

What is Quick Ratio?​

As one of the many financial ratios you can use to analyze a company’s financial standing and performance, the quick ratio will help you to gauge a company’s asset liquidity.

This particular liquidity ratio is also known as the acid test because, historically speaking, acid was at one time used to differentiate pure, valuable gold from worthless metal.

By measuring the combined total of an organization’s cash and cash equivalents against its current liabilities, you can determine its ability to fund its short-term debts using only those quick assets that can be easily converted into cash.

Similar to the current ratio, the higher the quick asset ratio value, the better a position the company is in.

The figures you’ll need to compute the quick ratio can usually be found on a company’s balance sheet.

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