The Merchandising Ratio: A Comprehensive Measure of Working Capital Strategy

Abstract

This teaching note has two objectives. First, it explores the limitations of the traditional measures of working capital management presented in the financial ratio analysis component of a typical accounting curriculum. Second, it presents an additional or alternative measure based on early work in the finance literature. Three current asset and liability accounts are combined into a single “Merchandising Ratio,” which provides a measure of the net effect of a firm's working capital management strategy. Data from a sample of retailing companies demonstrate how the merchandising ratio can be used to enhance students' analytical skills.