Working Capital Management – Crucial Ratios

Trường Lăng

April 10, 2019


Working Capital Management – Crucial Ratios

Trường Lăng

April 10, 2019

Table of Contents

Working Capital Management

working capital managementThe most important aspect of working capital management is the measure of a company’s liquidity position. In terms of quantifying, analysts use some ratios which can be used to compare a company’s liquidity measures with those of peer companies and to compare with its historical performance. By definition, liquidity ratios are to determine the firm’s ability to pay its short-term liabilities.
The current ratio is the well-known measure of liquidity:

  • current ratio = current assets current liabilities

The higher the current ratio, the greater the likelihood of the company being able to pay its short-term bills. A current ratio of less than one means the company’s working capital is negative and is likely facing a liquidity crisis.

  • quick ratio = cash+marketable securities+receivables current liabilities

The quick ratio is a stricter measure of liquidity because it does not include inventories and other assets that may not be very liquid.
The higher the quick ratio, the more likely it is that the company will be able to pay its short-term bills.

  • cash ratio = cash+mkt.  sec. current liabilities

The most conservative liquidity measure is the cash ratio. The higher the cash ratio, the more likely it is that the company will be able to pay its short-term bills.
By far, we only use a very short range of asset accounts. To exam further on a company’s liquidity, analyst use activity ratios. Those ratios also known as asset utilization ratios or operating efficiency ratios are to measure how efficiently the firm is managing its assets.
A measure of accounts receivable liquidity is the receivables turnover:

  • Receivables turnover = annual sales average receivables

A receivables turnover figure close to the industry standard is considered desirable.
A measure of a firm’s efficiency with respect to its processing and inventory management is the inventory turnover:

  • Inventory turnover = cost of goods sold average inventory

A measure of the use of trade credit by the firm is the payables turnover ratio:

  • Payables turnover = purchases average trade payables

The inverse of the receivables turnover multiplied by 365 (or 360) is the number of days of receivables (also called average days’ sales outstanding), which is the average number of days it takes for the company’s customers to pay their bills:

  • Days of sales outstanding = 365 receivables turnover

A collection period (and receivables turnover) close to the industry standard is considered desirable. Another important benchmark used to interpret this ratio is the credit terms of the company.
The similarity to days of inventory on hand and number of days of payables

  • Days of inventory on hand =  365 inventory turnover

As is the case with accounts receivable, it is considered desirable to have an inventory processing period (and inventory turnover) close to the industry norm. A processing period that is too high may result in too much capital being tied up in the inventory and may result in the inventory being obsolete. An excessively low processing period could indicate that the company has inadequate stock on hand, which could hurt sales.

  • Number of days of payables = 365 payables turnover

Related posts


Mastering Mutual Funds: A Comprehensive Guide

Table of Contents Establishing a Mutual Fund in VietnamKey Players in Mutual Fund EstablishmentFundamental Steps in Mutual Fund EstablishmentSecurities Trading License for Mutual Fund Management ...
Read more

Essentials of Asset Management Companies

Table of Contents Principles and Operations of Asset Management Companies in VietnamOverview of Asset Management Companies: Deciphering the Role According to Decree 53/2013/ND-CPOperational Principles: Covering ...
Read more

Demystifying Transfer Pricing: Strategies and Compliance

Table of Contents Types of Transfer PricingArm’s Length Principle: Navigating Fair and Transparent TransactionsCommon Methods: Exploring Transfer Pricing Approaches Used by Multinational CorporationsCompliance Challenges: Unraveling ...
Read more

Curing the Cash Surplus Conundrum: Insights from Vietnam’s Deputy Governor of the State Bank

Table of Contents 11 major solutions for credit expansion According to Deputy Governor Dao Minh Tu, the State Bank of Vietnam has given lending institutions ...
Read more

Download our Latest Ebook about Real Estate and Property!

Real estate holds a pivotal position in the development of a country, not only via the spillover impacts on other economic sectors such as construction, manufacturing, tourism, finance and banking etc. but also affecting the social dynamic by mobilizing the residency and infrastructure system. Foreign direct investment in real estate (RFDI) in Vietnam has a long running history and is unique in that it is largely dominated by the private sector compared to other industries which usually still have a rather large Government involvement. International capital has consistently been selecting real estate as the destination of choice, given that RDI has always been in the top 2 and 3 for volume inflow over the last 10 years, even throughout extremely turbulent periods such as COVID-19, per the General Statistics Office of Vietnam’s (GSO) data. Find out more in this ebook edition.

Tải cuốn ebook mới nhất về nền kinh tế số Việt Nam!

The digital economy of Vietnam has been fueled and accelerated by the global digital trends and the pandemic Covid-19. The movement of digital transformation is underway in every corner of Vietnamese life, strongly influencing the way people do things. Digital economy is the future of the Vietnam economy. Realizing the potential of the digital economy, the Vietnam government has issued policies, guidelines and created legal frameworks to support and further enhance this economy. In this ebook edition, the digital economy is looked at from different angles. Perspectives from the key elements comprising Vietnam digital economy are examined and discovered.

Our Happy Clients