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Is it true that whether the company has adopted Conservative Policy or Aggressive Policy we can identify this from the given data of the company from one year to another (or two similar companies if data is given) we can calculate all the working capital ratios such as:
Overcapitalization indicators:
1) Increase in Net Working Capital
2) Increase in Long-term & Short-term Finance
3) Increase in Receivable, Inventory & Payables
4) Increase in Receivable days, Inventory days & Payable days
5) Increase in Current ratio & Quick ratio
6) Increase in Net Operating Cycle
7) Increase in Cash available
8) Increase in CA & NCA
9) Increase in Sales to Working Capital ratioWhile Overtrading indicators are opposite of mentioned ratios above…
Secondly, please tell me whether Conservative Policy is the same as Overcapitalization which means we have too high WC which means higher receivables, inventory & payables.
However, Aggressive Policy is the same as Overtrading which means we have too low WC which means lower receivables, inventory & payables.
[And all the working capital ratios can be used to identify whether the company is overtrading or overcapitalization]
All those indicators can be relevant in deciding as to whether or not the company appears to be over capitalised (but comparing with similar companies – not from year to year for the same company).
Overtrading is not simply the opposite. It is where the company is expanding rapidly without raising the necessary long-term finance to increase the working capital sufficiently. I explain this in my free lectures.
Discussion about aggressive and conservative policies depends on whether discussing the financing policy or the investment policy.
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