sales to current assets ratio

Definition:- What is Sales to current assets ratio-

  • Sales to current assets ratio is the type of liquidity ratio used to measure how efficiently an organization is using its current assets to generate revenue. It refers to the relationship between net sales and the current assets of a business.
  • Current assets include cash, marketable securities, prepaid expenses, inventories, and any other receivables.
  • The sales to current asset ratio will provide you with the foremost meaningful measure of liquidity when it’s used to analyze businesses that hold a big amount of inventory.
  • This ratio is not used to analyze a company that has kept always a very low inventory.

Formula

The ratio of annual net sales and current assets is called Sales to current assets ratio, You can use the following formula to calculate the company’s sales to working capital ratio.

Sales\quad to\quad current\quad assets\quad ratio\quad =\quad \frac { Net\quad sales }{ Current\quad assets }

If you do not know about Current Assets, Current Liabilities, Inventory, Market Securities, Account Receivables, and Account Payables, then you can find the first post of Liquidity Ratio, which will make you easy to understand.

To get financial data of any Indian company, first of all, you can go to the website of moneycontrol.com and get all the data in the balance sheet section.

Example of sales to current assets ratio

Let’s take a look at a simplified example of a company that you can consider as an investment.

We are taking the example of an ABC LTD. (Assumed)a company whose financial data you can find in the balance sheet section on the website named Moneycontrol.com

Assumed data is taken in the following array

QUARTERLY RESULTS of ABC LTD. (In Cr. INR)March 2020March 2019March 2018March 2017
Net sales30000295683025632561
Current assets26551273012635125000

Using these data and the given formula, you can calculate the sales to current ratio of the company ABC company.

2020-sales\quad to\quad current\quad assets\quad ratio=\frac { 30000 }{ 26551 } =1.12

2019-sales\quad to\quad current\quad assets\quad ratio=\frac { 29568 }{ 27301 } =1.08

2018-sales\quad to\quad current\quad assets\quad ratio=\frac { 30256 }{ 26351 } =1.14

2017-sales\quad to\quad current\quad assets\quad ratio=\frac {32561  }{ 25000 } =1.30

You saw in the above example that ABC company’s sales to current assets ratio is almost constant which is a good sign for a company.

Sales to current assets ratio analysis

  1. This ratio is used in analyzing a company that keeps its inventory in its own warehouse instead of giving it to the customer on a credit card. If we say in other words, this ratio is used to analyze that company. Is done which keeps more inventory stores like shoe company, bags company, etc
  2. When the current sales ratio of a company decreases continuously then it is a good sign for the company
  3. When the current assets ratio of a company is very high, then it means that the company does not have sufficient working capital as it can only have 2 reasons to have a high ratio, in which the first is to increase the sales and second is the occurrence of current assets
  4. When the sales of a company increases but its current assets are constantly decreasing, it means that most of the money for making the product has been financed by debt and we already know that a company It is not good to have more debt, so when the liability of a company increases with the increase in sales, then the sales to current assets are very high.
  5. When a company continuously increases its current assets along with increasing or keeping constant its sales, then it is a good sign for a company because when the current assets of a company increase, it means that the company directly owes its liabilities Continuously reducing
  6. After calculating the sales to Current assets ratio of a company, it is decided to invest it only after comparing it with the ratio of the same industry’s company or with the ratio of the industry average.

Note

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