Stock Working Capital Ratio
Chapter Twenty-Nine
Syllabus topic 2, "Balance Sheet Ratios : i) Current Ratio ii) Liquid Ratio iii) Stock Working Capital Ratio iv) Proprietary Ratio v) Debt Equity Ratio vi) Capital Gearing Ratio"
Pages 78 to 79 of 162
In one line
The stock working capital ratio says what proportion of the working capital is tied up in stock.
The formula
Stock working capital ratio = (Stock / Working capital) x 100
Expressed as a percentage, or as "x to 1". MU's list gives no standard and there is no conventional one, so it is read against the previous year and against the industry rather than against a norm.
Working capital = current assets less current liabilities, which is why Module I built the vertical form.
Worked on Sunrise
| 2026, Rs | 2027, Rs | |
|---|---|---|
| Stock | 2,60,000 | 3,00,000 |
| Current assets | 5,90,000 | 7,60,000 |
| Less: current liabilities | (2,50,000) | (3,60,000) |
| Working capital | 3,40,000 | 4,00,000 |
| 2026 | 2027 | |
|---|---|---|
| Stock working capital ratio | 76.47 per cent | 75.00 per cent |
Specimen working: Rs 3,00,000 over Rs 4,00,000 times 100 is 75.00 per cent.
Interpretation
Three quarters of Sunrise's working capital is stock. That is a large share, and it means the company's short-term position depends heavily on being able to sell what it holds.
The direction is favourable. The ratio fell from 76.47 to 75.00, so the stock grew a little more slowly than the working capital that carries it.
Read it beside the liquid ratio. Sunrise's liquid ratio of 1.17 to 1 and its stock working capital ratio of 75 per cent say the same thing from two directions: a lot of the short-term resources are in a form that has to be sold before it can pay anybody.
What the level means
| Ratio | Usually means |
|---|---|
| Low, say under 50 per cent | Working capital is mostly in debtors and cash, so it is liquid; but check whether stock is too thin to serve the trade |
| Moderate | Normal for a manufacturer or a trader |
| High, near or above 100 per cent | Almost the whole of the working capital is locked in stock; any slowdown in sales becomes a cash problem at once |
| Above 100 per cent | Stock exceeds the whole working capital, so part of the stock is being financed by current liabilities |
The last row is the one to be able to explain. If stock is Rs 5,00,000 and working capital is Rs 4,00,000, the ratio is 125 per cent, which means creditors are financing a quarter of the stock. It is arithmetically possible and it is a warning.
Why it is a useful ratio
The current ratio treats every current asset alike. A rupee of cash and a rupee of unsold stock count the same in it. This ratio separates the least liquid current asset from the rest and measures it against the net short-term resources.
And it explains a puzzle the current ratio creates. A company with a current ratio of 3 to 1 looks safe. If its stock working capital ratio is 130 per cent, it is not, because the current ratio is being held up by stock that has not been sold.
The rest of this chapter
Module one is free. The rest of this chapter comes with the B.Com. (Accountancy) Semester 3 notes.
You are reading a chapter from a later module. Everything in module one of every subject stays free, and so does the syllabus.
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Free either way: the syllabus, and module one of every subject.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.