B2 - M3: Working Capital Metrics

Question 1

Working Capital

Answer 1

= Current Assets - Current Liabilities

• meausres a company’s liquidity and short term financial health
• > 0 (+) = entity can fund operations and invest and grow
• < 0 (-) = entity may have trouble paying creditors
• As WC increases, risk decreases, and cash and marketable securities increases
• As WC decreases, risk increases, and cash and marketable securities decreases

Question 2

Current Ratio

Answer 2

= Current assets / Current liabilities

• demonstrates an organizations ability to meet short term obligations

Question 3

Quick Ratio

Answer 3

= (Cash and Equiv. + ST marketable sec. + Receivables, net) / Current liabilities

• more rigorous test of liquidity than the current ratio since it removes prepaids and inventory

Question 4

Cash Conversion Cycle

Answer 4

= Days in inventory + Days sales in AR - Days payables outstanding

• amount of time from first production expense to the date cash is collected from the customer reduced by the time to pay vendors
• lower is better b/c it means an entity is collecting cash from sales quickly

Question 5

Days in inventory

Answer 5

= Ending Inv. / (COGS/365)

• measure of effectiveness of an entity’s inventory management

Question 6

Inventory turnover

Answer 6

= COGS / Avg Inventory

• measures effectiveness of an entity’s inventory management

Question 7

Days in AR

Answer 7

= Ending AR (net) / (Sales (net) / 365)

Question 8

AR Turnover

Answer 8

= Sales (net) / Avg. AR (net)

Question 9

AP Turnover

Answer 9

= COGS / Avg. AP

Question 10

Days payables Outstanding

Answer 10

= Ending AP / (COGS / 365)

Question 11

Working Capital Turnover

Answer 11

= Sales / Avg Working Capital

• measures how effective a company is at generating sales based on funds used in operations
• higher is better, but too high might indicate there may not be enough capital to keep up with sales