# 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:
## Working Capital Turnover Ratio Formula:
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:
Cash
Bills Receivables
Sundry Debtors
Stock
Sundry Creditors
Cost of sales |
10,000
5,000
25,000
20,000
30,000
150,000 |
**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. |