Working Capital Turnover Ratio

What is the Working Capital Turnover Ratio?

Working Capital Turnover Ratio helps determine how efficiently the company is using its working capital (current assets – current liabilities) in the business and is calculated by dividing the company’s net sales during the period by the average working capital during the same period.

Working Capital Turnover Ratio Formula

It signifies how well a company is generating its sales concerning the working capital. The company’s working capital is the difference between the current assets and current liabilities of a company.

The formula for calculating this ratio is by dividing the company’s sales by the company’s working capital.

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Working Capital Ratio Explanation Video

Interpretation

It signifies how well a company is generating its sales concerning the working capital. The two variables to calculate this ratio are sales or turnover and a company’s working capital. The company’s working capital 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 capitalExamples For The Calculation Of The Working CapitalWorking capital is the amount of money required by a business to finance its day-to-day operations. As an example, a manufacturer's working capital of $100,000 is calculated by subtracting current liabilities of $200,000 from existing assets of $300,000.read more 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 company A, the sales for a particular company are $4000.

Working capital, which is current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more minus current liabilities, is a balance sheet itemCurrent Liabilities, Is A Balance Sheet ItemCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.read more that is why it is important to take the average of working capital. For the calculation of working capital, the denominator is the 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 the Working Capital Turnover Ratio.

The 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 itemBalance Sheet ItemAssets such as cash, inventories, accounts receivable, investments, prepaid expenses, and fixed assets; liabilities such as long-term debt, short-term debt, Accounts payable, and so on are all included in the balance sheet.read more 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 the Working Capital Turnover Ratio of Tata Steel.

The result will be –

The working capital ratio for Tata steel is 19.83

It is important to look at the working capital ratio across ratios and compare it to the industry to analyze the working capital. A higher ratio generally signals that the company generates more revenue with its working capital. When the current assets are higher than the current liabilities, the working capital will be a positive number. If the inventory level is lesser than the payables, then the working capital is low, which is in this case. That makes the working capital ratio very high.

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 itemBalance Sheet ItemAssets such as cash, inventories, accounts receivable, investments, prepaid expenses, and fixed assets; liabilities such as long-term debt, short-term debt, Accounts payable, and so on are all included in the balance sheet.read more 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.

The 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, the working capital will be a positive number. If the inventory level is lower than the payables, then 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 ratioWorking Capital RatioThe working capital ratio is the ratio that helps in assessing the financial performance and the health of the company where the ratio of less than 1 indicates the probability of financial or liquidity problems in the future to the company, and it is calculated by dividing the total current assets of the company with its total current liabilities.read more across ratios and compare it to the industry to analyze the formula well.

Working Capital Turnover Ratio Calculator

You can use this calculator

Relevance and Use

A higher working capital generally signals that the company generates more revenue with its working capital. When the current assets are higher than the current liabilities, the working capital will be positive. It is important to look at all the parts that go 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 sells their finished goods. It is important to look at the working capital ratio across ratios 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

Frequently Asked Questions (FAQs)

Recommended Articles

This article has been a guide to what is Working Capital Turnover Ratio? Here we discuss how to calculate Working Capital Turnover Ratio and its formula, along with practical examples and downloadable excel sheets. You can learn more about accounting from the following articles –

• Capital Turnover
• Turnover vs. Profit
• Net Working Capital
• Formula of Working Capital
• Fixed Capital vs. Working Capital