![]() ![]() The working capital turnover ratio is also referred to as the net revenue to working capital ratio.Ī working capital turnover ratio can give several benefits to a corporation. This analogy is particularly useful when the benchmark companies have a similar capital structure. This is an especially strong indicator when the accounts payable portion of working capital is very high, indicating that management is unable to pay the bills when they become due.Ī high turnover ratio can be identified by comparing the ratio for a specific company to that published elsewhere in its industry to see if the business is showing outlier performance. Working capital turnover ratio = 6.0 Working Capital Turnover Ratio IssuesĪn unusually high turnover ratio may mean that a business lacks sufficient capital to sustain its revenue growth hence, the company’s demise could be imminent. Its turnover ratio is calculated as follows: ((Beginning working capital + Ending working capital) / 2) Net sales Read Also: Umunne- Economics: The Igbo Apprentice Model Working Capital Turnover Ratio ExampleĪBC Company’s net revenues over the last twelve months totaled $12,000,000, with an average working capital of $2,000,000. Also, it takes into account the average working capital over that time period. The measurement is typically done on an annual or trailing 12-month basis. Working Capital Turnover Formulaĭivide net sales by working capital to get the ratio (which is current assets minus current liabilities). Thus, this could ultimately result in an excess of bad debts and redundant inventory write-offs. Hence, a high turnover ratio means that management is using a firm’s short-term assets and liabilities to fund revenue in an extremely efficient manner.Ī low ratio, on the other hand, means that a company is investing in too many accounts receivable and inventory assets to finance its revenue. ![]() ![]() Working capital is described as current assets less current liabilities. The turnover ratio assesses how effectively a business uses its working capital to sustain a specified amount of revenue. Read Also: Elumelu, Compensation Advantages, and Other People How does the Working Capital Turnover Ratio work? They include accounts payable and short-term loans.įor example, if your small company has total current assets of $700,000 and total current liabilities of $500,000, your working capital is $200,000. Current liabilities are obligations that you plan to pay off in a year or less. Cash and other resources that you plan to use or convert to cash within a year, such as accounts receivable and inventory, are examples of current assets. Calculation of Working CapitalĪccording to Accounting Coach, working capital equals total current assets minus total current liabilities, all of which are on the balance sheet. In this article, we’ll learn more about the working capital turnover, formula, and some examples. A high ratio, in general, will help the company’s operations operate more smoothly and reduce the need for additional funding. So, the working capital turnover ratio assesses how effectively a company uses its working capital to generate revenue. It is the amount of money that a company has left to spend on activities after paying off its bills and short-term debts. Working capital is an essential component of operating a small company. ![]()
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