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.
$$Working\quad Capital\quad Turnover\quad Ratio=$$$$\frac { Net\quad Sales }{ Average\quad Working\quad Capital } $$
Where,
Net Sales = Total Sales – Returns and Purchases
$$Average\quad Working\quad Capital=$$$$\frac { Opening\quad W.C\quad +\quad Closing\quad W.C }{ 2 } $$
$$Average\quad Working\quad Capital=$$$$\frac { Opening\quad W.C\quad +\quad Closing\quad W.C }{ 2 } $$ ⇨Rs. 310000.00Average Working Capital = (450000 + 170000) / 2
Working Capital Turnover Ratio = Net Sales / Average Working Capital
⇨1000000 / 310000 = 3.23
$$Working\quad Capital\quad Turnover\quad Ratio=$$$$\frac { Net\quad Sales }{ Average\quad Working\quad Capital } $$
Net Sales = Total Sales – Returns and Purchases
$$Average\quad Working\quad Capital=$$$$\frac { Opening\quad W.C\quad +\quad Closing\quad W.C }{ 2 } $$
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.
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$$Average\quad Working\quad Capital=$$$$\frac { Opening\quad W.C\quad +\quad Closing\quad W.C }{ 2 } $$ ⇨Rs. 310000.00Average Working Capital = (450000 + 170000) / 2
Working Capital Turnover Ratio = Net Sales / Average Working Capital
⇨1000000 / 310000 = 3.23
Hence, Working Capital Turnover Ratio = 3.23
