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
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Calculating Gross profit Margin
Calculating Operating Margin
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Calculating Return on Assets (ROA)

From The Hoss's Mouth

Return on assets (ROA) is a tool investors use to determine how competent an organization is at using its assets to produce earnings. There are two primary formulas for calculating ROA.

Method One: Net Profit Margin x Asset Turnover

Method Two: Net Income / Average Assets for the Period

Both methods are acceptable but the investor must make sure that s/he uses the same method when performing these calculations, otherwise when comparing companies the results may be skewed. Just like when calculating the win percentage of two horses in a race, a handicapper would not use a formula which calculates win percentage by using total wins divided by total races for one horse and a formula that uses total wins at today's distance divided by total races at today's distance for another. This type of comparison would not produce meaningful results.

Generally speaking, the higher the ROA the better, however remember that widely different industries produce widely different ROA's. Industries such as railroads are asset heavy and will have lower ROA's than asset light companies. So always compare companies that are in the same industries; to use an old cliche: compare apples to apples.

There are many free online financial services which provide you with ROA numbers for all companies listed on the stock exchange, therefore Money Magazine Hoss is not going to bore you with sample calculations. Why perform all these mathematical calculations yourself when somebody is doing it for you and for free? For example, a quick look at Yahoo Financial shows that Amazon has a ROA of 6.93%.

Stay on Track,

Money Magazine Hoss

Next Hoss Cents Free Financial Money Magazine Post: August 23, 2009
Return to previous post from Calculating Return on Assets (ROA)

Related Posts:
Calculating Asset Turnover
Calculating Return On Equity
Financial Statements Explained
The Balance Sheet
The Income Statement
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Investment Strategy Dollar Cost Averaging
Market Timing
Calculating Net Profit Margin

Calculating Net Profit Margin

Calculating Asset Turnover Ratio

From The Hoss's Mouth

Asset turnover ratio is another financial tool investors use in their analysis of a company's efficiency. It calculates a business's effectiveness at using its assets in producing sales or revenue. The formula for this simple calculation is as follows:

Asset Turnover = Revenue/Assets (Assets in the example below are averaged for the period being calculated)

Let's take a look at Amazon for an example:

In 2005 Amazon had total assets of $3,696,000,000

In 2006 Amazon had total assets of $4,363,000,000

Average Assets = ($3,696,000,000 + $4,363,000,000) /2 = $4,029,500,000

Amazon's Total Revenue for 2006 was $19,166,000,000

Amazon's 2006 asset turnover ratio: $4,029,500,000 /$19,166,000,000 = .21

What this tells the investor is that for every dollar of assets Amazon had in 2006, they sold $.21 worth of product and services.

Money Magazine Hoss must point out that when comparing asset ratios it is important to compare companies that are in the same business industry. Generally, the company with the highest ratio is the most efficient.

Stay on Track,

Money Magazine Hoss

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Related Posts:

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