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  = Opening Working Capital + Closing Working Capital
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  = Opening Working Capital + Closing Working Capital
2
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
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