Working Capital Turnover Ratio
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 |
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 articles from “financial statement analysis” chapter:
- Horizontal and Vertical Analysis
- Ratios Analysis
- Horizontal Analysis or Trend Analysis
- Trend Percentage
- Vertical Analysis
- Accounting Ratios Definition, Advantages, Classification and Limitations:
- 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 (EPS) Ratio
- Price earning ratio
- Current ratio
- Liquid/Acid test/Quick ratio
- 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
- Debt-to-equity ratio
- Proprietary or Equity ratio
- Ratio of fixed assets to shareholders funds
- Ratio of current assets to shareholders funds
- Interest coverage ratio
- Capital gearing ratio
- Over and under capitalization
- Financial-Accounting- Ratios Formulas
- Limitations of Financial Statement Analysis
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:
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 timesSignificance: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. |
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You may also be interested in other articles from “financial statement analysis” chapter:
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Other Related Accounting Articles:
- Fixed Assets Turnover Ratio
- Current Assets to Proprietor’s Fund Ratio
- Over trading and Under Trading
- Creditors / Accounts Payable Turnover Ratio
- Proprietary Ratio or Equity Ratio
- Financial Accounting Ratios & Formulas
- Return on Equity Capital (ROEC) Ratio
- Fixed Assets to Proprietor’s Fund Ratio
- Expense Ratio
- Dividend Yield Ratio
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