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Estimates the ability of a company to use its cash to generate sales.[sc:kit02 ]
Sales to Working Capital Formula
Explanation of Sales to Working Capital
The Sales to Working Capital ratio measures how well the company’s cash is being used to generate sales. Working Capital represents the major items typically closely tied to sales, and each item will directly affect this ratio.
Importance of Sales to Working Capital
An increasing Sales to Working Capital ratio is usually a positive sign, indicating the company is more able to use its working capital to generate sales. Although measuring the performance of a company for just one period reveals how well it is using its cash for that single period, this ratio is much more effectively used over a number of periods.
This ratio can help uncover questionable management decisions such as relaxing credit requirements to potential customers to increase sales, increasing inventory levels to reduce order fulfillment cycle times, and slowing payment to vendors and suppliers in an effort to hold on to its cash.