Working Capital Turnover
It is a measure to define how well the company has made an investment in the company’s working capital for funding the daily operations and sales. The working capital turnover calculator helps determine the efficient working of this by the management. Generally, a higher ratio is better and suggests that the company does not require more funds. Similarly, a lower ratio depicts poor management of short-term funds. But an extreme higher ratio may also have drawbacks attached to it.
Formula
For calculating the working capital turnover ratio, we divide net sales by working capital. The formula is as follows:
Working Capital Turnover Ratio = Net Sales / Working Capital
About the Calculator / Features
The working capital turnover calculator provides the result of the calculation ins seconds on entering the following variables:
- Net sales
- Working capital
Calculator
How to Calculate using Calculator
For calculating the working capital turnover ratio using this calculator, you are required the following variables only.
Net Sales
The figure of net sales can be obtained from the statement of income and expenditure. Net sales mean the sum total of sales less sales return, discounts, etc., during the period.
Working Capital
Working capital means monetary resources to fund the daily functioning of the company. It is the difference between the current assets and current liabilities of the company.
Example of Working Capital Turnover
Suppose you are provided with the data of five companies, LG, Omega, Camron, Sky, and MG. You are required to calculate and interpret the working capital turnover ratio of all these five companies.
| Particulars | LG | Omega | Camron | Sky | MG |
| Current Assets | 2,000 | 3,450 | 1,730 | 900 | 750 |
| Current Liabilities | 3,500 | 3,200 | 1,500 | 800 | 690 |
| Sales | 2,000 | 1,750 | 800 | 500 | 550 |
| Returns | 500 | 285 | 165 | 120 | 145 |
| Discount & Taxes | 167 | 300 | 40 | 90 | 70 |
Calculation of Working Capital:
| Company | Current Assets (CA) | Current Liabilities (CL) | Working Capital (CA – CL) |
| LG | 2,000 | 3,500 | (1,500) |
| Omega | 3,450 | 3,200 | 250 |
| Camron | 1,730 | 1,500 | 230 |
| Sky | 900 | 800 | 100 |
| MG | 750 | 690 | 60 |
Calculation of Net Sales:
| Company | Sales (1) | Returns (2) | Discount & Taxes (3) | Net Sales (1)-(2)-(3) |
| LG | 2,000 | 500 | 167 | 1,333 |
| Omega | 1,750 | 285 | 300 | 1,165 |
| Camron | 800 | 165 | 40 | 595 |
| Sky | 500 | 120 | 90 | 290 |
| MG | 550 | 145 | 70 | 335 |
Working Capital Turnover Ratio:
| Company | Net Sales | Working Capital | Ratio |
| LG | 1,333 | (1,500) | (0.89) |
| Omega | 1,165 | 250 | 4.66 |
| Camron | 595 | 230 | 2.59 |
| Sky | 290 | 100 | 2.9 |
| MG | 335 | 60 | 5.58 |
Interpretation
As discussed above, a higher ratio is better and suggests that the company does not require more funds. Similarly, a lower ratio depicts poor management of short-term funds. But an extreme higher ratio may also have drawbacks attached. In the above example, LG has a negative ratio while Omega and MG have a very high ratio. Camron and Sky have the optimum working capital turnover ratio.
Cautions
Since Omega and MG have a very high ratio, this may be due to the underutilization of working capital. And a lower or negative ratio depicts poor performance. A company and its management, hence, carefully allocate funds in the short run too. Efficient management of working capital will lead to less financial cost and lesser unnecessary expenses and diversions.
