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Does high levels of working capital equate to more liquidity less profitability and vice versa? I understand that cash is obviously a liquid asset but how are inventory and receivables liquid assets? They would take time to convert into cash
The answer to your first question is yes.
It certainly does take longer to convert receivables and inventory into cash. As far as receivables are concerned, a company should try to at least match the collection period to the payment period for payables – so although it takes time to receive the cash, it is taking time before the cash is needed to pay liabilities.
For inventory, it takes longer because the inventory needs first to be sold before it then turns into a receivable. That is why the acid-test / quick ratio is a useful indicator of liquidity.
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