What is Working Capital Turnover Ratio?
Working Capital Turnover Ratio helps in determining that how efficiently the company is using its working capital (current assets – current liabilities) in the business and is calculated by diving the net sales of the company during the period with the average working capital during the same period.
Working Capital Turnover Ratio Formula
It signifies that how well a company is generating its sales with respect to the working capital of the company. Working capital of a company is the difference between the current assets and current liabilities of a company.
The formula for calculating this ratio is by dividing the sales of the company by the working capital of the company.
Interpretation
It signifies that how well a company is generating its sales with respect to the working capital of the company. The two variables to calculate this ratio is sales or turnover and the working capital of a company. Working capital of a company is the difference between the current assets and current liabilities of a company.
Examples
Let’s see some simple examples for the calculation of the working capital turnover ratio formula to understand it better.
Example#1
Let us try to understand how to calculate the working capital of an arbitrary company, by assuming the variables used to calculate working capital turnover.
Suppose for a company A, the sales for a particular company are $4000.
For the calculation of working capital, the denominator is the working capital. Working capital which is current assets minus current liabilities is a balance sheet item that is why it is important to take the average of working capital. Let’s assume that the working capital for the two respective periods is 305 and 295.
So, the following is the calculation of Working Capital Turnover Ratio
Result will be –
Example#2
Let us try to understand how to calculate this ratio of Tata Steel.
For the calculation of working capital, the denominator is the working capital. Working capital which is current assets minus current liabilities is a balance sheet item that is why it is important to take the average of working capital. The working capital for Tata steel for the two respective periods is 2946 and 9036
So, the following is the calculation of Working Capital Turnover Ratio of Tata Steel
Result will be –
The working capital ratio for Tata steel is 19.83
A higher ratio generally signals that the company is generating more revenue with its working capital. When the current assets are higher than the current liabilities than the working capital will be a positive number. If the inventory level is lesser in comparison to the payables than the working capital is low, which is in this case. That makes the working capital ratio very high. It is important to look at working capital ratio across ratio and also in comparison to the industry to make a good analysis of the working capital.
Example#3
Let us try to understand how to calculate the working capital turnover of Hindalco.
Working capital which is current assets minus current liabilities is a balance sheet item that is why it is important to take the average of working capital. The working capital for Hindalco for the two respective periods is 9634 and 9006. The below snapshot depicts the variables used to calculate this ratio.
Result will be –
The working capital ratio for Hindalco is 1.28.
A lower ratio generally signals that the company is not generating more revenue with its working capital. When the current assets are higher than the current liabilities than the working capital will be a positive number. If the inventory level is lower in comparison to the payables than the working capital is high, which is in this case. That makes the working capital very low. It is important to look at working capital ratio across ratio and also in comparison to the industry to make a good analysis of the formula.
Working Capital Turnover Ratio Calculator
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Relevance and Use
A higher working capital generally signals that the company is generating more revenue with its working capital. When the current assets are higher than the current liabilities than the working capital will be a positive number. It is important to look at all the part that goes into the formula. It’s important to analyze whether the ratio is higher or lower due to a high level of inventory or the management of debtors or credits from whom the company buys raw materials or to whom they sell their finished goods. It is important to look at working capital ratio across ratio and also in comparison to the industry to make a good
You can download this Excel Template here – Working Capital Turnover Ratio Formula Excel Template
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