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
 Debttoequity 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
 FinancialAccounting 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. 

You may also be interested in other articles from “financial statement analysis” chapter:

