The working capital turnover ratio is calculated to get an idea of how the company is using its working capital to generate sales or revenue. It is an important activity ratio that looks at the short-term performance of the company.
Formula
Working capital turnover = Sales Revenue / Average Working Capital
Here,
Average working capital = (Opening working capital + closing working capital) /2
Opening working capital = Opening current assets – opening current liabilities
Closing working capital = Closing current assets – Closing current liabilities
Analysis
A higher working capital turnover ratio indicates that the company is performing good as it is utilizing its working capital very efficiently in generating the sales and vice versa. But, we need to consider the same ratio for the competitors as well in order to make any final decision.
Example
Alpha industry has following balances of current assets and current liabilities:
As at 1ST Jan, 2015As at 31st Dec,2015
Current assets 500,000 700,000
Current Liabilities 400,000 500,000
Revenue for the period ended 31 Dec, 2015 is $100,000.
Solution
Opening working capital = Opening current assets – opening current liabilities = 500,000 – 400,000 = 100,000
Closing working capital = Closing current assets – Closing current liabilities = 700,000 – 500,000 = 200,000
Average working capital = (Opening working capital + closing working capital) /2 = (100,000 + 200,000) /2 = $150,000
Working capital turnover = Sales Revenue / Average Working Capital = 100,000 / 150,000 = 0.67