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Working Capital Productivity

Description: The working capital productivity measure is similar to the sales to current assets ratio, in that both are used to see if there are a sufficient number of assets available to support a given level of sales activity.  The working capital productivity measure tends to be somewhat more accurate, since it subtracts current liabilities from current assets to arrive at a net current asset figure that may be considerably less than the total current assets figure used in the other measurement.

Alternatively, an excessively low working capital productivity measurement reveals that a company is quite inefficient at producing sales, because it has too much invested in accounts receivable and/or inventory to produce a given level of sales.  The measure can be compared to the results of competitors to see if the company is using its working capital in the most effective manner.

Formula: Divide annual sales by total working capital.  It may be useful to also calculate average working capital, in case the ending working capital for the reporting period is unusually high or low.  The formula is as follows:

Annual Sales
Working Capital

Cautions: This is generally a reliable measure.  Its main failing is in the derivation of the annual sales figure in the numerator.  If the sales figure used here departs considerably from the annualized amount of sales within the recent past, then it does not result in a good comparison of sales level to working capital requirements.  This can also be a problem if the measurement is made at the end of a high seasonal sales peak, since annualized sales will appear to be quite high, while the inventory component associated with working capital will have been greatly reduced, resulting in a ratio that appears to be too high.