  Download material                Accounting topics                Accounting dictionary                Financial calculators Home » Accounting Ratios Analysis/Financial Ratios Analysis » Working Capital Turnover Ratio

# Working Capital Turnover Ratio:

 New Page 1

## Definition and Explanation:

Working capital turnover ratio establishes relationship between cost of sales and net working capital. As working capital has direct and close relationship with cost of goods sold, therefore, the ratio provides useful idea of how efficiently or actively working capital is being used.

Interpretation of this ratio should be done when inter-firm or inter-period comparison is being done. Increasing ratio indicates that working capital is more active; it is supporting, comparatively, higher level of production and sales; it is being used more intensively.

## Formula:

Working capital turnover ratio =  Cost of sales / Average net working capital

Where,

cost of sales = Opening stock + Net purchases + Direct expends - Closing stock

Net working capital = Current assets - Current liabilities

Average of networking capital is calculated, as usual, opening + closing dividing by 2. However, if the information regarding cost of sales and opening balance of networking capital is not available then the formulae should be substituted as:

Net sales / Net working capital

## Example:

From the summarized balance sheet given below of a company calculate working capital turnover ratio.

 2000 2001 \$ \$ Equity 1,24,000 1,22,000 Long term loans 1,10,000 80,000 Current liabilities 74,000 1,38,000 3,08,000 3,40,000 Fixed assets 2,08,000 1,98,000 Current assets 1,00,000 1,42,000 3,08,000 3,40,000

Your are informed that sales (net) during 2000 and 2001 amounted to \$6,00,000 and \$5,00,000 respectively and Gross profit for the two years was \$80,400 and \$60,801 respectively.

Working Notes:

 Ascertaining cost of sales: 2000 2001 \$ \$ 6,00,000 5,500,000 Loss gross profit 80,4000 60,8000 Cost of sales 5,19,600 4,39,200 Ascertaining networking capital: 2000 2001 \$ \$ 1,00,000 1,42,000 Current assets 1,00,000 1,42,000 Less current liabilities 74,000 1,38,000 Net working capital 26,000 4,000

Average networking capital cannot be calculated for the year 2000 because opening figure is not available. Hence we shall use closing balance.

Average networking capital for the year (2001)

(Opening + Closing) / 2

= (26,000 + 4,000) / 2

= 30,000 / 2

= \$15,000

Working capital turnover ratio (2000)

= Cost of sales / Net working capital

= 5,19,000 / 26,000

20 times (app.)

Working capital turnover ratio (2001)

= Cost of sales / Average networking capital

= 4,39,200 / 15,000

= 29 times (approx.)

More study material from this to

## More study material from this topic: Meanings, Nature and Usefulness of Ratios Analysis Interpretation of Ratios Important Factors for Understanding Ratios Analysis Significance and Usefulness Ratios Analysis Classification of Ratios Analysis of Short Term Financial Position or Test of Liquidity Current Ratio Quick/Acid Test/Liquid Ratio Absolute Liquid Ratio Inventory/Stock Turnover Ratio Debtors / Receivable Turnover Ratio Creditors / Payables Turnover Ratio Working Capital Turnover Ratio Profitability Ratios Gross Profit Ratio (GP Ratio) Operating Profit Ratio Net profit ratio (NP ratio) Earnings Per Share Ratio Operating ratio Expense ratio Solvency ratios - Test of Long Term Solvency Debt-equity Ratio Debt Service Ratio or Interest Coverage Ratio Fixed Assets Ratio Debts to Total Funds or Solvency Ratio Reserves to Capital Ratio Capital Gearing Ratio Proprietary Ratio Accounting Ratios Formulas Limitations of Ratios Analysis

A D V E R T I S E M E N T  