Answer (C) is correct . A high sales-to-working-capital ratio is usually favorable because working capital, by itself, is an unprofitable use of resources. A firm does not earn money by holding cash, inventory, or receivables. Such assets should be minimized. However, a high ratio of sales to working capital may indicate either very high sales (a good situation) or a low supply of working capital (a potentially bad situation). Thus, a high ratio could indicate that a firm is undercapitalized and does not have the resources to invest in working capital.
Answer (A) is incorrect because A high ratio means low levels of working capital compared to sales. The firm may be using its current assets effectively.
Answer (B) is incorrect because A high ratio means low levels of working capital compared to sales. The firm may be using its current assets effectively.
Answer (D) is incorrect because A high ratio may indicate insufficient working capital to support the company’s sales level, with resulting liquidity problems.
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