ACCA Financial Management (F9) Certification Practice Exam

What does the sales revenue to net working capital ratio indicate?

1. Efficiency in using current assets

2. Profitability of overall operations

3. Liquidity of the company

4. Capability to manage long-term debt

The correct answer is: Efficiency in using current assets

The sales revenue to net working capital ratio is a critical measure of how efficiently a company is using its current assets to generate sales revenue. By examining this ratio, a business can determine how effectively its current assets, such as cash, accounts receivable, and inventory, are being utilized to support operations and drive sales. A higher ratio indicates that the company is generating a significant amount of sales relative to its net working capital, which implies that it is using its resources effectively. This efficiency is vital for maintaining operational fluidity and ensuring that a company can cover its short-term obligations while still promoting growth through sales. Other choices, while important aspects of financial analysis, do not directly correlate with what the sales revenue to net working capital ratio conveys. The ratio does not measure profitability of overall operations, as profitability is evaluated through metrics like net profit margin rather than sales in relation to working capital. Additionally, it does not directly assess liquidity, which relates more to a company’s ability to meet short-term obligations, or long-term debt management, which pertains to financing strategies and capital structure. Thus, the correct focus of this ratio is purely on operational efficiency regarding asset utilization.