Working Capital Turnover Ratio Analysis

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Working Capital Turnover Ratio 

The working capital turnover ratio indicates a company’s efficiency in using its working capital.

The working capital turnover ratio is an activity ratio that measures dollars of revenue generated per dollar of investment in working capital. Working capital is defined as the amount by which current assets exceed current liabilities.

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A higher working capital turnover ratio is favorable. It means that the company is developing its working capital more efficiently that is using less investment & generating more revenue.

Working Capital Turnover Ratio Formula

Working Capital Turnover Ratio
Working Capital Turnover Ratio

Working Capital Turnover Ratio Example:

Let’s take this example of TOYO Co Ltd. We have the following data to calculate working capital turnover ratio

Revenue300,000
Current Assets 800,000
Current Liabilities450,000

 

Let find out the working capital first, as we know

Working Capital = Current Assets − Current Liabilities

                                    =   800,000 – 450,000

Working Capital   =    350,000

Working Capital Turnover Ratio =     Revenue_________

                                                             Average Working Capital

Working Capital Turnover Ratio  =  300,000
                                                                  350,000

Working Capital Turnover Ratio  = 0.85

It indicates that TOYO Co using his investment in working capital less efficiently as indicated by its lower  working capital turnover ratio