Working Capital or Net Current Assets is the difference between Current Assets and Current Liabilities. This is the money with which the business is run. Working Capital makes Sales happen. Working Capital is arranged in the form of Inventories, Sundry Debtors or Account Receivables and Sundry Creditors or Account Payables. The distribution of the capital between the three items becomes the face of any business. This distribution is characteristic of a particular business and a business is seldom able to change this structure over its lifetime. This distribution of capital is indicative to investors to be worthy of investment. Everybody will like to be invested in business which lower distribution of capital in Inventories and Sundry Debtors. This indicates that inventory is readily consumed and sale money is not stuck with customers.
As I said earlier, Working Capital makes Sales happen. Working Capital is the money with which we buy Inventories, process it, then sell it, receive the cash from customers and pay the suppliers of the inventories. The ratio of Sales and Working Capital indicates the efficient use of Working Capital. Its an important indicator which an investor must pay attention to.
Return on Capital Employed (RoCE) is simply Operating Profits over Capital Employed. Capital Employed is the addition of Fixed Assets and Working Capital. RoCE is an effective indication of the returns being generated from the business. It indicates the effective use of Fixed Assets and Working Capital.
Thus, a better RoCE is mainly reliant upon the effective use of Working Capital. The arrangement of the capital across the components of Working Capital and RoCE indicates towards the quality of the business.
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