Working Capital Turnover Ratio:

Definition:

Working capital turnover ratio indicates the velocity of the utilization of net working capital.

This ratio represents the number of times the working capital is turned over in the course of year and is calculated as follows:

Formula of Working Capital Turnover Ratio:

Following formula is used to calculate working capital turnover ratio

[Working Capital Turnover Ratio = Cost of Sales / Net Working Capital]

The two components of the ratio are cost of sales and the net working capital. If the information about cost of sales is not available the figure of sales may be taken as the numerator. Net working capital is found by deduction from the total of the current assets the total of the current liabilities.

Example:

Calculate working capital turnover ratio

Calculation:

Working Capital Turnover Ratio = Cost of Sales / Net Working Capital

Current Assets = $10,000 + $5,000 + $25,000 + $20,000 = $60,000

Current Liabilities = $30,000

Net Working Capital = Current assets – Current liabilities

= $60,000 − $30,000

= $30,000

So the working Capital Turnover Ratio = 150,000 / 30,000

= 5 times

Significance:

The working capital turnover ratio measure the efficiency with which the working capital is being used by a firm. A high ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover ratio may also mean lack of sufficient working capital which is not a good situation.

 

You may also be interested in other relevant articles: Horizontal Analysis or Trend Analysis Trend Percentage Vertical Analysis Limitations of Financial Statement Analysis Accounting Ratios definition, advantages, classifications and limitations Financial Ratio Formulas Profitability ratios: Gross profit ratio Net profit ratio Operating ratio Expense ratio Return on shareholders investment or net worth Return on equity capital Return on capital employed (ROCE) ratio Dividend yield ratio Dividend payout ratio Earnings Per Share Ratio Price earning ratio Liquidity ratios: Current ratio Liquid /Acid test / Quick ratio Activity ratios: Inventory/Stock turnover ratio Debtors/Receivables turnover ratio Average collection period Creditors/Payable turnover ratio Working capital turnover ratio Fixed assets turnover ratio Over and under trading Leverage ratios or long term solvency ratios: Debt equity ratio Proprietary or Equity ratio Ratio of fixed assets to shareholders funds Ratio of current assets to shareholders funds Interest coverage or debt service ratio Capital gearing ratio Over and under capitalization

 

Dear visitor! Do you like this article? If you like, then please bookmark this page and also share with your friends. Thank you for your support.

Back to Home Page | Back to Financial Statement Analysis Page