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
Market Timing
Calculating Net Profit Margin

Calculating Net Profit Margin

From The Hoss's Mouth

Money Magazine Hoss continues his series on financial performance ratio calculations with today's post highlighting Net Profit Margin. This ratio tells the potential investor how much profit a company generates for every $1 of revenue. It is considered to be a measurement of a company's efficiency in converting revenue to profit. Investors normally prefer companies with a high net profit margin. Formula as follows:

Net Profit Margin = Net income/Revenue * 100 %

We will continue using the income statements of Amazon, GM and Google to provide examples.

Amazon's Net Profit Margin :

2006: $190,000/$10,711,000 * 100 = 1.8%

2007: $476,000/$14,835,000 * 100 = 3.2%

2008: $645,000/$19,166,000 * 100 = 3.4%



GM's Net Profit Margin:



2006: -$1,978,000/$207,349,000 * 100 = -9.5%

2007: -$43,297,000/$181,122,000 * 100 = -24%

2008: -$30,860000/$148,979,000 * 100 = -20.7%


Google's Net Profit Margin:



2006: $3,077,446/$10,604,917 * 100 = 29%

2007: $4,203,720/$16,593,986 * 100 = 25.3%

2008: $4,226,858/$13,174,044 * 100 = 32.1%


Once again, as in Money Magazine Hoss's previous financial indicator examples, when we compare the Net Profit Margin of the three companies, Google without question has the best performance.


Stay on Track,

Money Magazine Hoss

Next Hoss Cents Free Financial Money Magazine Post: Calculating Return On Equity
Return to previous post from Calculating Net Profit Margin

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

Financial Statements Explained

From The Hoss's Mouth

The technical definition of a financial statement goes something like this, depending on which dictionary you use: a written report that quantitatively summarizes the financial status of an individual or organization for a stated period of time.

Why is a financial statement important to the potential investor? It shows you where a company's money came from, where it went, where it is likely to go, and where it is now.

These are statistics any wise investor must know and understand before purchasing stock in a company or even buying a company outright. It is similar to a racing form, which gives the handicapper important information on all horses running in a race and enables him/her to make a selection based on the criteria s/he deems important.

In short, a financial statement enables you to analyze the financial health of any company you are considering for investment purposes and consists of four main parts.

1. Balance Sheet: Shows at a fixed point in time what a company owns and what a company owes.
2. Income Statements: These show how much money a company made and how much it spent over a certain period of time.
3. Cash flow Statement: A summary of cash inflows and cash outflows during an accounting period.
4. Statement of Shareholders' Equity: Shows what money would be left for the shareholders if a company sold off all its assets and paid off all its liabilities.

The Hoss, in the next several postings, will review in detail each of the main parts of a financial statement. He hopes that once you have read all the information you will have a good understanding of the components of a financial statement and be in a position to make wise investment choices.

Stay on track,

The Hoss

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