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I have read that an increase in this ratio means that a company is using its funds better to generate sales. In an answer (June 2016 sample Q 1) it says that an increase from 12 times to 86 times, shows that working capital investment has not matched the increase in sales revenue. I am confused. Can you explain ?
For the ratio to stay the same, the sales and working capital would both need to increase by the same %.
If the ratio has increased from 12 to 86 then it means sales have increased much more than the level of working capital has increased.
All companies should attempt to manage their working capital efficiently (such as by collecting receivables quickly) and improving the management will increase the ratio.
However, as sales increase you would expect receivables (and therefore working capital) to increase and for the ratio to have increased as much as in this question looks worrying and a likely sign of overtrading.
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