Investment Policy

Thank you for your answer, Sir Moffat. May GOD bless you 🙂

1) In the exam question, we simply have to look at the factors by comparing with similar companies in the industry to identify whether we have adopted conservative investment policy by investing too much in our WC or we have adopted aggressive investment policy by investing too low funds in our WC. [correct?]

2) Is it true that all the ratios that I mentioned in my earlier post will indicate an increase in the Working Capital of a company if those ratios increase as compared to another company in the sector? [correct?]

3) We can look for these ratios to see whether we have higher working capital (i.e. overcapitalization) such as:
i) Increase in Net Working Capital
ii) Increase in Long-term Borrowings
iii) Increase in Levels of Receivables, Inventory & Payables
iv) Increase in Receivable days, Inventory days & Payable days (i.e. Operating Cash Cycle) AND
v) Increase in Net Operating Cycle
vi) Current ratio or Quick ratio (if they increase we have conservative policy and if they decrease we have aggressive policy);
vii) Increase in CA & NCA
viii) Increase in Sales to Net Working Capital ratio
ix) Increase in Cash available

If the ratios mentioned above result in increasing as compared to another company in the sector then it is indicating that the company has invested too much funds in its WC (and therefore it is a conservative policy or we can say company has overcapitalization). [correct?]