Working Capital Per Dollar of Sales

From The Hoss's Mouth

Working Capital Per Dollar of Sales is another financial calculation investors use when analyzing the performance of a company. This calculation tells the potential investor the approximate working capital a company should have.

Simply put, working capital is Current Assets minus Current Liabilities. Working capital per dollar of sales is the Working Capital divided by Total Sales and is expressed as a percentage.

Working Capital Per Dollar of Sales = (Current assets - Current liabilities)/Total Sales.

Current assets and liabilities can be found on a company's Balance Sheet, and total sales is found on a company's Income Statement.

The trick for investors is recognizing the fact that working capital per dollar of sales varies across industry types.

For example, retailing businesses with substantial low cost sales require a working capital per dollar of sales of about 10 to 15 %, while industrial manufactures who produce high cost merchandise require 25 to 30%. Companies such as fast food chains, due to the cash nature of their business, often operate with a negative working capital per dollar of sales.

Smart investors, when analyzing prospective companies, are always cognizant of the fact that the character of the business plays a huge part in determining the amount of working capital per dollar of sales a business requires.

Money Magazine Hoss hopes you will find this information useful.

Stay on Track,

Money Magazine Hoss

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