Inventories are used in your selling activities, in production and whatnot. However, have you measured they’re turnover, namely how many times they’re sold and replaced over a period?
There are two methods reaching the ratio: (1) either you divide sales revenue with inventory balance or (2) you divide cost of goods sold with average inventory. Note that the result gives you the time the balance is “going through your profit and loss accounts”. To come back to the formulas, whilst the first one seems to be most popular, note that the second option is more accurate since inventory is recognized at its cost into cost of goods sold whereas sales revenue is made in selling prices including profit margins on top of the cost. Continue reading
Working capital enables us to measure both liquidity and efficiency of a company. Considering how it is calculated, it gives a good and imminent overview of the financial health of the company. Obviously every industry has its own sort of expected levels of working capital, but there are still indicators out there which tell a thing or two to creditors and investors. 
‘Cash ratio’ is used to measure company’s liquidity. To start from terminology, liquidity means the ability to pay up debt and obligations taken. The higher the liquidity, the more resources a company has to satisfy its creditors. Liquidity is achieved by having cash and cash equivalents, accounts receivable and inventory at least at stabile levels. The higher those levels, the more liquid a company may be deemed.