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

Finding the Best Mutual Fund

From the Hoss's Mouth

The best mutual funds are those that produce the highest total return from the date of your initial investment. That's easy for everyone to understand. However, what's not so easy is determining which mutual funds are most likely to produce the greatest return over time.

Some investors may think that if a fund returns 10% one year and loses 10% the next year they have at least broke even. Wrong. If you invested $100,000 and gained 10% the first year your total would be $110,000. Now you lose 10% the next year your balance is $110,000-10%= $99,000. You are down $1000. What about if I lost 10% the first year and gained 10% the next year? Sorry, same result. You still have only $99,000.

To further complicate the issue, for time periods of more than one year, a mutual fund's total return is annualized. When doing your research, you the discreet investor will avoid these annualized returns and concentrate on a mutual fund's year to year actual total returns. Why? Because annualized returns are not an accurate report of a mutual fund's total performance. Take a look at the following chart.

Year	Fund 1	Value	Fund 2	Value	Fund 3	Value	Fund 4	Value
1	5%	$105,000.00	5%	$105,000	0%	$100,000	-10%	$90,000
2	5%	$110,250.00	2%	$107,100	10%	$110,000	-5%	$85,500
3	5%	$115,726.50	8%	$115,660	5%	$115,500	30%	$111,150
Annualized	5%		5%		5%		5%
Return
Compound	5.25%		5.22%		5.17%		3.72%
Return

Note that each of the four mutual funds have an annualized return of 5%. Yet they do not all produce the same end result. The best result is $115,726.00; the worst $111,150.00. A very significant difference of $4,576.00.

Bottom line: The wise investor, in order to pick which mutual funds are likely to produce the best return over time must carefully research each fund and concentrate on the year to year returns. This information is available on the website of most mutual fund companies. The longer a mutual fund has been in existence the easier it is to evaluate its track record.

Stay on track,

The Hoss

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