Net Sales to Working Capital: Which statement is true about this ratio?

• A. It measures how efficiently working capital is deployed
• B. It has no relation to working capital
• C. It is calculated as NET SALES / NET WORTH
• D. It is always decreasing as sales rise

Answer: (A)

Net Sales to Working Capital shows how efficiently a company uses its working capital to generate sales. Working capital, typically current assets minus current liabilities, is the pool of short-term resources the business relies on day to day. By dividing net sales by this amount, the ratio indicates how many dollars of sales are produced per dollar of working capital. A higher ratio means the company is turning its short-term assets into sales more efficiently, which is the core idea behind this metric. It’s about operational efficiency, not profitability or leverage.

This ratio is calculated using working capital in the denominator, not net worth, so it’s related to the level of short-term resources, not equity. It doesn’t have to trend downward as sales rise; changes in working capital relative to sales will determine whether the ratio goes up or down.