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Working Capital vs. Working Capital Per Dollar of Sales
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Working Capital vs. Working Capital Per Dollar of Sales
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Hi, I'm Brad Meehan for About.com. Today, I'm going to talk to you about the differences between working capital and working capital per dollar of sale.

Calculating Working Capital

Working capital is a very important number when investing in stock. In order to find it, you look at your current balance sheet and we find current assets minus current liabilities equals working capital. Working capital shows us what would happen if you took all of the company's working assets and subtracted all of its current liabilities, and working capital is what would be left.

How to Use Working Capital

This gives us a good idea if a company has the money to expand on it's own, or if it's going to have to borrow money to do that. And if it does borrow money, if it will have any problems making it's payments. A company that shows a decline in working capital over time is often a company that is about to hit financial trouble. A company that has a lot of inventory and a lot of sales is not a company that needs a lot of working capital. Quick sales means that they can quickly stock pile money when needed.

Calculating Working Capital Per Dollar of Sales

Working capital per dollar of sale is a little bit different. This number shows how much working capital a company needs per dollar of sale. Again, this is going to vary, based on what kind of business it is. Companies that quickly shift through inventory like retail sales, they only need like ten to fifteen percent, while a company that deals with manufacturing is going to need more like 20 percent to keep going. This number allows you to keep track of just how efficient a company is. Working capital, divided by total sales equals working capital per dollar of sale. Understanding working capital and working capital per dollar of sale is an important part of making decisions for your portfolio.

Thanks for watching, and for more information, check us out on the web at About.com.
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