Accounting for Player Contracts – Advanced Scenarios
In the previous article, we have already seen that accounting for sporting franchises involves certain scenarios that are specific only to the sporting industry. We saw how the accounting for player contracts was unique and why it was important to understand the accounting implications. In this article, we will continue to have a look at […]
The Role of Government in Financial Systems
In the previous articles, we have already established that the financial system of any country is the key to its economic prosperity. It is for this reason that these financial systems need to be appropriately maintained. The government is the party that is most suited to this maintenance of financial systems. However, too much government […]
Changing Cost Structure in the Retail Industry
The retail industry has undergone a lot of changes in the recent past. Each of these changes have been strategic in nature. As a result, their impact has been more or less permanent. This impact can be seen and felt in many ways across the entire retail organization. One of the ways in which this […]
The Fallacy of Creative Destruction
There is a widely held view that creative destruction is the cause of all business cycles. This explanation is used to convince people that business cycles are a good phenomenon. On the other hand, this explanation does not provide any insight as to why business cycles have been there only for a couple of centuries […]
Types of Intervention by Central Banks in Forex Markets
When Do Central Banks Intervene in the Forex Market ? Central Banks do not intervene often in the Forex market. In fact, the intervention by Central Banks can be considered to be a sign of significant economic weakness in a currency. As a result, Central Bank intervention usually only happens when the currency is under […]
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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