What are the Key Challenges with Working Capital Productivity Ratio Analysis?
Three possible problems with the Working Capital Productivity ratio are: • Investors & industry may incorrectly make the assumption that a high ratio makes the best investment. As with all ratios a single ratio should not be used to make investment decisions. A trend by month or quarter may be one alternative approach. • Investors & industry may compare ratios with inappropriate companies, however such comparisons may also give management evidence that processes need to be improved or re-engineered. • Investors & industry should not look at the ratio in isolation. More insight can be gained by comparing with other organizations or industry. It is however critical to understand any variance in accounting policies when carrying out such an analysis.
