Friday, November 19, 2010

Financial Metrics - Working Capital Ratios

Sales can solve a lot of business problems.  Sustainable business are built upon sound policies concerning current assets and supported by sufficient working capital.  The following ratios can be used to evaluate a business's net working capital:
  • Working Capital Turnover
  • Current Debt to Net Worth
  • Funded Debt to Net Working Capital
Working Capital Turnover - helps to ascertain whether your business is top-heavy in fixed or slow assets.  A high ratio may indicate that your business requires additional funds to support its financial structure, top heavy with fixed investments.

Net Sales / Net Working Capital = Working Capital Turnover Ratio

Current Debt to Net Worth - measures the proportion of funds that current creditors contribute to your operations.

Current Liabilities / Tangible Net Worth = Current Debt to Net Worth Ratio

Funded Debt to Net Working Capital - long term debt should not exceed net working capital. 

Long-Term Debt / Net Working Capital = Funded Debt to net Working Capital Ratio

Read more about ratios at:
Financial Metrics - Ratio Analysis Considerations    

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