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

Next Hoss Cents Free Financial Money Magazine Post: August 30, 2009
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Related Posts:
Calculating return on assets (roa)
Calculating Asset Turnover
Calculating Return On Equity
Financial Statements Explained
The Balance Sheet
The Income Statement
Calculating Gross profit Margin
Calculating Operating Margin
Investment Strategy Dollar Cost Averaging
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Calculating Net Profit Margin

Calculating Return On Equity (ROE)

From The Hoss's Mouth

Financial analysts differ in their opinions of the value of using Return On Equity calculations to evaluate whether or not to buy shares in a company. Before Money Magazine Hoss gives you the pros on cons of this argument, lets examine the equation for calculating Return On Equity (ROE).

ROE= Net Income/Shareholder Equity

Financial analysts in favour of using ROE as an indication of when to buy stock suggest that you track ROE, and when you see a company with a double digit ROE and which is continually increasing it might be wise to consider buying the stock. You can use one of the many free or pay for service financial web sites available on the Internet for tracking ROE. Note: Not all continue to list ROE, but many do.

Other financial analysts consider ROE to be of little or no value to the potential investor. They point out that Net Income is not always a reliable corporate performance measurement. Why? Because companies use varying accounting procedures when calculating items such as capitalization, depreciation and growth rate, to name a few. Therefore, they conclude the formula for calculating ROE is not always reliable to determine a company’s success or corporate value.

The differing opinions are not unlike those of handicappers selecting a horse to bet on. Some use a horse’s total earnings divided by total races to determine the horse’s potential class. Many handicappers frown on this practice, as it does not take into account other factors such as but not limited to age, sex, distance, and surface.

In summary, the use of ROE by investors as a tool for investment purposes is a matter of personal choice.

Stay on Track,

Money Magazine Hoss

Next Hoss Cents Free Financial Money Magazine Post: Asset Turnover
Return to previous post from Calculating Return on Equity (ROE)



Related Posts:

Financial Statements Explained

The Balance Sheet

The Income Statement

Calculating Gross profit Margin Calculating Operating Margin

Investment Strategy Dollar Cost Averaging

Market Timing

Calculating Net Profit Margin