The sales to current assets ratio is a financial ratio that measures how efficiently a company uses its current assets to generate sales. It is calculated by dividing the net sales by the total current assets. The ratio indicates how well a company manages its working capital and liquidity. A higher ratio means that the company is generating more sales per unit of current assets, which implies better asset utilization and profitability. A lower ratio means that the company has excess or idle current assets, which implies poor asset management and lower returns.
The sales to current assets ratio can be used to compare the performance of different companies in the same industry or sector. It can also be used to track the changes in a company’s asset efficiency over time. However, the ratio should be interpreted with caution, as it may vary depending on the nature of the business, the industry norms, and the accounting policies. For example, a company that has a seasonal business may have a lower ratio during the off-season, but a higher ratio during the peak season. A company that uses a different inventory valuation method may have a different ratio than a company that uses the same method. Therefore, it is important to consider the context and the factors that may affect the ratio before drawing any conclusions.
How to Calculate Sales to Current Assets Ratio in Excel
To calculate the sales to current assets ratio in Excel, we need two pieces of information: the net sales and the total current assets. Net sales are the total revenue minus the sales returns, allowances, and discounts. Total current assets are the sum of all the assets that can be converted into cash within one year, such as cash, accounts receivable, inventory, marketable securities, etc. We can find these data from the income statement and the balance sheet of the company, respectively.
Once we have the data, we can use a simple formula to calculate the ratio. The formula is:
In Excel, we can input the data in adjacent cells, say B3 and B4, and then use the formula “=B3/B4” in another cell, say B5, to get the ratio. For example, if the net sales are $500,000 and the total current assets are $250,000, then the ratio is 2. This means that the company generates $2 of sales for every $1 of current assets.
Example of Sales to Current Assets Ratio in Excel
To illustrate how to calculate the sales to current assets ratio in Excel, let us consider a hypothetical example of two companies, A and B, that operate in the same industry. The following table shows their income statements and balance sheets for the year 2023.
| Company A | Company B |
|---|---|
| Income Statement | |
| Net Sales | $1,000,000 |
| Cost of Goods Sold | $600,000 |
| Gross Profit | $400,000 |
| Operating Expenses | $200,000 |
| Operating Income | $200,000 |
| Interest Expense | $50,000 |
| Income Before Taxes | $150,000 |
| Income Tax Expense | $45,000 |
| Net Income | $105,000 |
| Balance Sheet | |
| Current Assets | |
| Cash | $50,000 |
| Accounts Receivable | $100,000 |
| Inventory | $150,000 |
| Marketable Securities | $50,000 |
| Total Current Assets | $350,000 |
| Non-Current Assets | |
| Property, Plant, and Equipment | $500,000 |
| Intangible Assets | $100,000 |
| Total Non-Current Assets | $600,000 |
| Total Assets | $950,000 |
| Current Liabilities | |
| Accounts Payable | $100,000 |
| Short-Term Debt | $50,000 |
| Accrued Expenses | $50,000 |
| Total Current Liabilities | $200,000 |
| Non-Current Liabilities | |
| Long-Term Debt | $300,000 |
| Deferred Tax Liability | $50,000 |
| Total Non-Current Liabilities | $350,000 |
| Total Liabilities | $550,000 |
| Shareholders’ Equity | |
| Common Stock | $100,000 |
| Retained Earnings | $300,000 |
| Total Shareholders’ Equity | $400,000 |
| Total Liabilities and Shareholders’ Equity | $950,000 |
To calculate the sales to current assets ratio for both companies, we can use the formula “=B3/B4” in Excel, where B3 is the cell containing the net sales and B4 is the cell containing the total current assets. The following table shows the results.
| Company A | Company B |
|---|---|
| Sales to Current Assets Ratio | 2.86 |
We can see that both companies have the same sales to current assets ratio of 2.86. This means that they generate $2.86 of sales for every $1 of current assets. This indicates that they have similar levels of asset efficiency and liquidity. However, this does not mean that they have the same profitability or financial performance. We can see from the income statements that Company A has higher net sales, gross profit, operating income, and net income than Company B. This means that Company A has higher profit margins and returns than Company B. Therefore, we need to look at other financial ratios, such as the gross profit margin, the operating margin, the net profit margin, the return on assets, and the return on equity, to get a more comprehensive picture of the financial health and performance of the companies.
Other Approaches
Besides using the formula “=B3/B4” to calculate the sales to current assets ratio in Excel, there are other approaches that we can use. For example, we can use the SUM function to calculate the total current assets, instead of manually adding them up. The SUM function takes a range of cells as an argument and returns the sum of the values in those cells. For example, if the current assets are in cells B7 to B10, we can use the formula “=SUM(B7:B10)” to get the total current assets. Then, we can use the formula “=B3/B5” to get the ratio, where B5 is the cell containing the total current assets.
Another approach that we can use is to create a named range for the net sales and the total current assets. A named range is a way of assigning a name to a cell or a range of cells, so that we can refer to them by their names instead of their addresses. This can make the formulas easier to read and understand. To create a named range, we can select the cell or the range of cells that we want to name, and then go to the Formulas tab, click on Define Name, and enter a name in the Name box. For example, we can name the cell B3 as Net_Sales and the cell B4 as Total_Current_Assets. Then, we can use the formula “=Net_Sales/Total_Current_Assets” to get the ratio.
