The working capital ratio is an indicator of the efficiency of a company's management of stocks, debtors and creditors, it is:

(stocks+trade debtors-trade creditors) ÷sales

If the working capital ratio is 0.2, this means the company needs 20p of working capital for every £1 of annual sales. If annual sales increase by £100,000 of then the company will have to invest £20,000 in working capital to be able to meet this.

Changes in the working capital ratio can be further analysed by decomposing them into changes in debtor days, creditor days and stock days.

## Decomposition of working capital changes

The working capital ratio is equal to:

stock turnover+trade debtors/sales-trade creditors/sales

The second term (*trade debtors*/*sales*) is closely related to, and measures exactly the same thing as debtor days, while the third (*trade creditors*/*sales*) is a multiple of a (usually) good approximation for creditor days.

This can be used to analyse changes in working capital in terms of these three: so given a change in working capital you can look at these to see what caused it.