Working Capital Ratios
1. Net Sales to Total Tangible Assets (times) (NS/TTA):
Indicate the company's ability to generate sales by utilising its Tangible assets. Tangible assets are total assets minus intangible assets.
Rationale: It is very important to understand - whether achievement of sales by the unit is on account of utilising tangible assets or intangible assets. As mostly, Bank finance will be given for creation of tangible assets, performance of the unit is to be gauged based on utilization of tangible assets created out of Bank finance.
2. Operating Cycle- No. of total days: (Inventory / Net Sales) + (Receivables / Gross Sales) (Days):
Operating cycle is number of days required for a unit to put cash into its operations and then getting return in the form of cash i.e., period from cash to cash.
Rationale: It indicates the time required to produce goods, sell the goods and receive cash from customers by sale of goods. Higher the days, higher may be the requirement of WC. This is useful for estimating the amount of working capital that a unit needs in order to run the business.
3. Working Capital Gap:
WC gap = Total Current Assets – Other Current Liabilities (OCL).
If we deduct Bank borrowings out of total current liabilities, we will get OCL.
Rationale: WC gap signifies the amount of current assets getting funded by current liabilities, other than Bank borrowings.
4. Bank Finance (WC Gap – NWC):
Bank Finance = WC Gap – NWC
Rationale: While calculating required amount of short term Bank finance for a unit, we have to deduct available NWC from WC gap.
5. NWC / TCA (%):
It signifies the portion of current assets getting funded by NWC. Though, there is no standard benchmark for this ratio, ideally, this ratio should be more than 25%, minimum.
Higher the ratio, better is the comfort.
6. Sundry Creditors / TCA (%):
It signifies the portion of current assets getting funded by Sundry Creditors. Though, there is no standard benchmark for this ratio, ideally, this ratio should be restricted to maximum 25%.
Lower the ratio, better is the comfort.
7. BF / TCA (%):
It signifies the portion of current assets getting funded by Bank finance (BF). Though, there is no standard benchmark for this ratio, ideally, this ratio be restricted to maximum 50%.
Lower the ratio, better is the comfort.
8. OCL (excluding Sundry Creditors) / TCA %:
It signifies the portion of current assets getting funded by OCL, other than Sundry Creditors. Ideally, this ratio should be low or nil as these liabilities generally are of the nature of Public Deposits (maturing within next 1 year), unallotted Share Application Money, Advance / Deposits from Dealers, Installments of Term Loans (becoming due within next 1 year), Statutory Liabilities, Expenses Payables, Provisions etc which are having little role in creation of current assets.
Lower the ratio, better is the comfort.
9. OCA / TCA (%):
It is the amount of Other current assets out of total current assets. It signifies whether current liabilities are utilized by the unit for creation of core current assets like cash, inventory, receivables or utilised for creation of non core current assets like Advance payments, taxes, prepaid expenses etc.
Lower the ratio, better is the comfort.
1. Net Sales to Total Tangible Assets (times) (NS/TTA):
Indicate the company's ability to generate sales by utilising its Tangible assets. Tangible assets are total assets minus intangible assets.
Rationale: It is very important to understand - whether achievement of sales by the unit is on account of utilising tangible assets or intangible assets. As mostly, Bank finance will be given for creation of tangible assets, performance of the unit is to be gauged based on utilization of tangible assets created out of Bank finance.
2. Operating Cycle- No. of total days: (Inventory / Net Sales) + (Receivables / Gross Sales) (Days):
Operating cycle is number of days required for a unit to put cash into its operations and then getting return in the form of cash i.e., period from cash to cash.
Rationale: It indicates the time required to produce goods, sell the goods and receive cash from customers by sale of goods. Higher the days, higher may be the requirement of WC. This is useful for estimating the amount of working capital that a unit needs in order to run the business.
3. Working Capital Gap:
WC gap = Total Current Assets – Other Current Liabilities (OCL).
If we deduct Bank borrowings out of total current liabilities, we will get OCL.
Rationale: WC gap signifies the amount of current assets getting funded by current liabilities, other than Bank borrowings.
4. Bank Finance (WC Gap – NWC):
Bank Finance = WC Gap – NWC
Rationale: While calculating required amount of short term Bank finance for a unit, we have to deduct available NWC from WC gap.
5. NWC / TCA (%):
It signifies the portion of current assets getting funded by NWC. Though, there is no standard benchmark for this ratio, ideally, this ratio should be more than 25%, minimum.
Higher the ratio, better is the comfort.
6. Sundry Creditors / TCA (%):
It signifies the portion of current assets getting funded by Sundry Creditors. Though, there is no standard benchmark for this ratio, ideally, this ratio should be restricted to maximum 25%.
Lower the ratio, better is the comfort.
7. BF / TCA (%):
It signifies the portion of current assets getting funded by Bank finance (BF). Though, there is no standard benchmark for this ratio, ideally, this ratio be restricted to maximum 50%.
Lower the ratio, better is the comfort.
8. OCL (excluding Sundry Creditors) / TCA %:
It signifies the portion of current assets getting funded by OCL, other than Sundry Creditors. Ideally, this ratio should be low or nil as these liabilities generally are of the nature of Public Deposits (maturing within next 1 year), unallotted Share Application Money, Advance / Deposits from Dealers, Installments of Term Loans (becoming due within next 1 year), Statutory Liabilities, Expenses Payables, Provisions etc which are having little role in creation of current assets.
Lower the ratio, better is the comfort.
9. OCA / TCA (%):
It is the amount of Other current assets out of total current assets. It signifies whether current liabilities are utilized by the unit for creation of core current assets like cash, inventory, receivables or utilised for creation of non core current assets like Advance payments, taxes, prepaid expenses etc.
Lower the ratio, better is the comfort.
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