![]() High Working Capital Turnover RatioĪ high turnover ratio indicates that a company’s short-term assets and liabilities are being used effectively to drive sales. This is because the working capital turnover ratio will always be negative due to the negative working capital. If the working capital is negative then these comparisons are pointless. This comparison must be with other companies in the same industry. To determine how efficient a company is at using its working capital the analysts must compare working capital ratios. Interpretation of Working Capital Turnover Ratio Working Capital Turnover RatioNet Sales / Average Working Capital ![]() Net SalesTotal Sales – Returns – Discounts Working Capital As On 31st March 2022Current Assets – Current LiabilitiesĪverage Working Capital(Working Capital on The Beginning of the Period + Working Capital on The End of the Period) / 2 Working Capital As On 1st April 2021Current Assets – Current Liabilities Illustration on Calculation of Fixed Assets Turnover Ratio is: Particulars Working Capital = Current Assets – Current Liabilities How to Calculate Working Capital Turnover Ratio? Net Sales = Total Sales – Returns – DiscountsĪverage Working Capital = (Working Capital on The Beginning of the Period + Working Capital on The End of the Period) / 2 Working Capital Turnover Ratio = Net Sales / Average Working Capital The Formula for the Working Capital Turnover Ratio is: Such assets are known as current liabilities. Similarly, liabilities such as accounts payable, wages, taxes payable, advance received, interest payable, monthly loan installments are due within one year. Hence, these assets are described as current assets. Assets such as cash-in-hand, bank balance, accounts receivable, inventory, advance paid are expected to be liquidated or converted into cash in less than a year. It is calculated using the assets and liabilities listed on a company’s balance sheet. The difference between a company’s current assets and current liabilities is known as working capital. This would in turn potentially lead to a large number of bad debts and obsolete inventory write-offs. A low ratio, on the other hand, shows that a company is investing too much in accounts receivable and inventory assets to sustain its sales. Companies that have a greater working capital turnover ratio are more efficient in their operations and revenue generation.Ī high turnover ratio suggests that management is maximising the use of a company’s short-term assets and liabilities to boost sales. After all obligations have been met, this method gives a company an accurate estimate of how much money it has available to allocate toward operations (debts, bills, etc.). Working capital turnover is critical for any company. This ratio is also known as the net sales to working capital formula. Working capital is the operating capital that a company utilizes in its day-to-day activities. The working capital turnover ratio is an accounting ratio that determines how effectively a business utilises its working capital to generate revenue. Disadvantages of Using a Working Capital Turnover Ratio.Advantages of Using a Working Capital Turnover Ratio.Interpretation of Working Capital Turnover Ratio. ![]() How to Calculate Working Capital Turnover Ratio?. ![]() Fixed asset turnover and total asset turnover ratio should be used in such scenarios. In such a situation working capital turnover ratio is not very useful. UTX is clearly using its investment in working capital more efficiently as indicated by its higher working capital turnover ratio when compared to GE's ratio.ĪMZN on the other hand is not a competitor of GE or UTX so comparison between GE/UTX and AMZN based on working capital turnover ratio is not appropriate.įurther, AMZN's industry and its market position is such that it can maintain very low working capital. Since GE and UTX are competitors, working capital turnover ratio can be used to compare their asset utilization. The following schedule contains the required calculations: Relevant extracts from their financial statements are given below. Opening Working Capital + Closing Working CapitalĬalculate and analyze the working capital turnover ratios of General Electric (NYSE: GE), United Technologies Corporation (NYSE: UTX) and Amazon Inc. Working Capital = Current Assets − Current Liabilities Average Working Capital generating more revenue using less investment. It means that the company is utilizing its working capital more efficiently i.e. Working capital is defined as the amount by which current assets exceed current liabilities.Ī higher working capital turnover ratio is better. Working capital turnover ratio is an activity ratio that measures dollars of revenue generated per dollar of investment in working capital.
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