Saturday, February 18, 2012

Working Capital Margin

Working Capital:

Defined as current assets minus current liabilities, working capital can be an important indicator of a companies future performance. Unlike earnings per share or other lagging metrics, trends in working capital can be indicative of a companies future performance, ability to pay its bills, etc.

Gross Margin Return on Working Capital (GMROWC):

This metric combines working capital and gross margin to explore the relationship between inventory investment and the cash conversion cycle. Specifically, GMROWC is the percentage of profits on sales (margin) generated by the net investment in inventory and receivables.

To get to the calculation:

Working Capital Turnover= Days of Sales Outstanding+Days of Inventory Outstanding-Days of Payables Outstanding

GMROWC=working capital turnover*gross margin

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