Working capital ratios (`ratios.working_capital`)¶

Answers the question "how much does working capital tie up?". Returns days sales outstanding, days inventory outstanding, days payable outstanding and the cash conversion cycle, on a day basis chosen by the analyst.

Formula¶

\[ \text{DSO} = \frac{\text{trade receivables} \times \text{days}}{\text{revenue}} \qquad \text{DIO} = \frac{\text{inventories} \times \text{days}}{\text{cost of sales}} \qquad \text{DPO} = \frac{\text{trade payables} \times \text{days}}{\text{purchases}} \]

\[ \text{cash conversion cycle} = \text{DSO} + \text{DIO} - \text{DPO} \]

where days is 360 or 365, as chosen in day_basis. The denominators follow the CFA Institute curriculum (receivables on revenue, inventories on cost of sales, payables on purchases), which is also common Italian practice.

Example¶

from decimal import Decimal

import fairmark as fm

r = fm.ratios.working_capital(
    balances="closing",
    day_basis=365,
    income_statement={"revenue": 5000, "cost_of_sales": 3000, "purchases": 2800},
    closing={"trade_receivables": 1200, "inventories": 600, "trade_payables": 700},
)
assert r.days_sales_outstanding["value"] == Decimal("87.6")  # 1200 × 365 / 5000
assert r.days_inventory_outstanding["value"] == Decimal("73")  # 600 × 365 / 3000
assert r.days_payable_outstanding["value"] == Decimal("91.25")  # 700 × 365 / 2800
assert r.cash_conversion_cycle["value"] == Decimal("69.35")

Inputs¶

Field	Meaning	Default
`balances`	`closing`, or `average` of the opening and closing balance sheets	required
`day_basis`	`"360"` or `"365"`	required
`income_statement`	`revenue`, `cost_of_sales`, `purchases` of the year, currency units	required
`closing`	`trade_receivables`, `inventories`, `trade_payables`, currency units	required
`opening`	Same fields at the start of the period	required with average balances, not used otherwise

Amounts are used as given: state trade receivables and revenue on the same VAT basis, and trade payables and purchases likewise.

Outputs¶

Field	Meaning
`days_sales_outstanding`	Trade receivables × days / revenue, days
`days_inventory_outstanding`	Inventories × days / cost of sales, days
`days_payable_outstanding`	Trade payables × days / purchases, days
`cash_conversion_cycle`	DSO + DIO − DPO, days; not defined when one of the three is not

Ratios are objects {"value": ..., "not_defined": ...}, as in every ratio group.

Conventions (explicit, reported in `explain.conventions`)¶

Convention	Options	Default
Balances	closing, average of opening and closing	required
Day basis	360, 365	required
DSO, DIO, DPO denominators	revenue, cost of sales, purchases	fixed
VAT	amounts used as given	fixed
Not defined	zero denominator	fixed

Errors¶

Code	When
`FM-E001`	Average balances without `opening`; a day basis other than 360 or 365; a field is missing or unknown
`FM-E008`	Arithmetic overflow (inputs far outside a realistic range)

Accuracy¶

Each ratio multiplies by the days before dividing once, exact up to the 28 significant digits of the decimal type.

Verified against¶

Golden cases in tests/golden/ratios.working_capital/ (closing balances on 365 and on 360 days, average balances on 360 days, zero purchases), whose expected values come from scripts/reference_ratios.py (Python decimal at 50 digits), with the closed form written in each file.

Working capital ratios (ratios.working_capital)¶