What is Working Capital Turnover Ratio?
Working Capital Turnover ratio is computed by dividing sales by the net working capital. Net working capital is the excess of current assets over current liabilities.
The main purpose of calculating this ratio is that a firm may like to relate net current assets to sales. Ratio basically indicates what amount of net working capital is used for making one rupee of sales.
Example of Working Capital Turnover
ABC company has made sales of Rs 40,000. Its net current assets are 10,000. Computer Net Working Capital Turnover?
Net Working Capital Turnover = Sales/ Net Current Assets
= 40,000/ 10,000
= 4 times
The reciprocal of the ratio will become 0.25 that is the reciprocal of 4/1 is 1/4. It indicates that for one rupee of sales, the company needs Rs 0.25 of its net current assets. This gap is bridge with bank borrowings and long term sources of funds.
Interpretation of Working Capital Turnover Ratio
A higher working capital turnover is always better. A higher ratio indicates that company is utilizing its resources more efficiently. This means that company is generating more revenue using less investments.
Just like other financial ratios, you should compare this ratio to the other companies that belongs to the same industry. In addition to this, one should compare it with same company’s past and planned working capital turnover ratio.