Working Capital Turnover Ratio

Working Capital Turnover Ratio is a type of Turnover Ratio that determines the efficiency with which a business is using the working capital to support its sales.

Working Capital Turnover Ratio= Net Sales / Average Working Capital
Where,
Net Sales = Total Sales – Returns and Purchases
Average Working Capital= (Working Capital at the Beginning of Period + Working Capital at the End of Period / 2 

Significance and Interpretation

  • High Working Capital Turnover Ratio indicates the company is very efficiently using the current assets and liabilities to support its sales.
  • Low Working Capital Turnover Ratio indicates that the company has a significant volume of accounts receivables and/or low current assets.
It must be noted that while comparing two companies on the grounds of Working Capital Turnover Ratio, they should be of the same industry.

Examples

Example 1: Use the following data of ABC Ltd, to calculate its Working Capital Turnover Ratio.
Total Sales FY = Rs. 1000000.00
Working Capital at the Beginning of FY = Rs 170000.00
Working Capital at the End of FY = Rs 450000.00 
Solution:
Net Sales = Rs. 1000000.00
Average Working Capital = (450000 + 170000) / 2 = Rs. 310000.00
Working Capital Turnover Ratio = Net Sales / Average Working Capital
= 1000000 / 310000 = 3.23
Hence, Working Capital Turnover Ratio = 3.23
Join 40,000+ readers and get free notes in your email