Sales to Working Capital Ratio

Sales to Working Capital = Net Sales / (Accounts Receivable + Inventory - Accounts Payable)

Where:

• Net Sales = Gross Sales - Returns

Asset utilization measures allow investors to understand how well a company uses its assets in operations. Investors will typically track sales to working capital over time, looking for long term patterns in this metric. Companies with ratios that are higher than their industry average, or have ratios that increase over time, are desirable.

The components of the ratio can be used to explain its usefulness to analysts:

• Net Sales: excludes returned merchandise, thereby eliminating double-counting items returned to inventory.

• Accounts Receivable: if a company increases sales by lowering its creditworthiness standards, sales will increase at a slower rate than accounts receivable increases, and the sales to working capital ratio will decrease over time.

• Inventory: ideally, companies want to increase sales at a slower rate than the need to increase inventory. If a company needs to increase inventory to get products out to consumers faster, the sales to working capital ratio will decrease.

Earlier in the year, Company A's credit and collections department determined the company could tighten its credit policy without significantly hurting sales. At the same time, Company A eliminated several slow moving product lines from the company's portfolio of offerings. The table below demonstrates the impact of these process improvements on Company A's sales to working capital ratio over the last four quarters:

accounts receivable, accounts payable, inventory, working capital, sales to administrative expense ratio, sales backlog ratio, sales to employee, sales to fixed assets, sales returns to gross sales ratio