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
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.

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

  1. Horizontal and Vertical Analysis
  2. Ratios Analysis
  3. Horizontal Analysis or Trend Analysis
  4. Trend Percentage
  5. Vertical Analysis
  6. Accounting Ratios Definition, Advantages, Classification and Limitations:
  7. Gross profit ratio
  8. Net profit ratio
  9. Operating ratio
  10. Expense ratio
  11. Return on shareholders investment or net worth
  12. Return on equity capital
  13. Return on capital employed (ROCE) Ratio
  14. Dividend yield ratio
  15. Dividend payout ratio
  16. Earnings Per Share (EPS) Ratio
  17. Price earning ratio
  18. Current ratio
  19. Liquid/Acid test/Quick ratio
  20. Inventory/Stock turnover ratio
  21. Debtors/Receivables turnover ratio
  22. Average collection period
  23. Creditors/Payable turnover ratio
  24. Working capital turnover ratio
  25. Fixed assets turnover ratio
  26. Over and under trading
  27. Debt-to-equity ratio
  28. Proprietary or Equity ratio
  29. Ratio of fixed assets to shareholders funds
  30. Ratio of current assets to shareholders funds
  31. Interest coverage ratio
  32. Capital gearing ratio
  33. Over and under capitalization
  34. Financial-Accounting- Ratios Formulas
  35. 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:

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.

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

  1. Horizontal and Vertical Analysis
  2. Ratios Analysis
  3. Horizontal Analysis or Trend Analysis
  4. Trend Percentage
  5. Vertical Analysis
  6. Accounting Ratios Definition, Advantages, Classification and Limitations:
  7. Gross profit ratio
  8. Net profit ratio
  9. Operating ratio
  10. Expense ratio
  11. Return on shareholders investment or net worth
  12. Return on equity capital
  13. Return on capital employed (ROCE) Ratio
  14. Dividend yield ratio
  15. Dividend payout ratio
  16. Earnings Per Share (EPS) Ratio
  17. Price earning ratio
  18. Current ratio
  19. Liquid/Acid test/Quick ratio
  20. Inventory/Stock turnover ratio
  21. Debtors/Receivables turnover ratio
  22. Average collection period
  23. Creditors/Payable turnover ratio
  24. Working capital turnover ratio
  25. Fixed assets turnover ratio
  26. Over and under trading
  27. Debt-to-equity ratio
  28. Proprietary or Equity ratio
  29. Ratio of fixed assets to shareholders funds
  30. Ratio of current assets to shareholders funds
  31. Interest coverage ratio
  32. Capital gearing ratio
  33. Over and under capitalization
  34. Financial-Accounting- Ratios Formulas
  35. Limitations of Financial Statement Analysis

Other Related Accounting Articles:

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