Working Capital Turnover Ratio Formula

Working Capital Turnover Ratio Formula (Table of Contents)

• Working Capital Turnover Ratio Formula
• Examples of Working Capital Turnover Ratio Formula (With Excel Template)
• Working Capital Turnover Ratio Formula Calculator

Working Capital Turnover Ratio Formula

Working Capital Turnover Ratio Formula contains two terms i.e. “Working Capital” and “Turnover”. Before understanding Working Capital Turnover Ratio, we need to first understand what Working Capital is and also what is Turnover for business means.

Working Capital

Working capital is capital required by the business for the operation of day to day business. Working capital is extremely important for a business to run successfully. If there is no proper management of Working Capital, a business can be stuck in between. Working capital is short term funds requirement. A company must continuously monitor its Working Capital and take corrective actions as when required immediately. Positive Working Capital means that business has sufficient short term funds to pay off its short term liabilities and is good for business.

Working Capital is a difference between Current Assets and Current Liabilities. In equation form, Working Capital can be written as follows.

Working Capital = Current Assets – Current Liabilities

Current Assets includes Cash & Bank Balance, Sundry Debtors, Short Term Loans and Advances, Short Term deposits, Inventory.

Current Liabilities includes Bank OD, CC, and Sundry Creditors for Purchases, Expenses, Taxes Payables, other payables within a year.

Turnover

Turnover of business means net sales of the Company. Net sales mean Gross Sales less all discounts, credit notes and taxes. Turnover is used in calculations of many ratios. In the equation form Turnover can be written as below:

Turnover = Sales – Discounts – Credit Note – Taxes

As we understood the meaning of both the terms namely Working Capital and Turnover, we are good to understand the Working Capital Turnover Ratio.

Working Capital Turnover Ratio

Working Capital Turnover Ratio is used to do an analysis of the utilization of short term resources for sales. Working Capital Turnover Ratio is the ratio of net sales to working capital.

Formula For Working Capital Turnover Ratio

Examples of Working Capital Turnover Ratio Formula (With Excel Template)

Let’s take an example to understand the calculation of the Working Capital Turnover Ratio in a better manner.

Working Capital Turnover Ratio – Example #1

Calculate the Working Capital Turnover Ratio with below information and Interpret the same:

Solution:

Working Capital is calculated using the formula given below

Working Capital = Current Assets – Current Liabilities

• Working Capital = Rs 750,000 – Rs 350,000
• Working Capital = Rs 400,000

Working Capital Turnover Ratio is calculated using the formula given below

Working Capital Turnover Ratio = Turnover (Net Sales) / Working Capital

• Working Capital Turnover Ratio = Rs 1,150,000 – Rs 400,000
• Working Capital Turnover Ratio = 2.88

Hence, Working Capital Turnover ratio is 2.88 times which means that for every sale of unit 2.88 Working Capital is utilized for the period.

Working Capital Turnover Ratio – Example #2

From the Balance Sheet of Bill Energy Limited (Listed Company), Calculate the Working Capital Turnover Ratio for Five Years and Interpret the same.

With the help of the Balance Sheet, we have the following information.

Source: Money Control

Solution:

Working Capital is calculated using the formula given below

Working Capital = Current Assets – Current Liabilities

For Mar’18

• Working Capital = 67.01 -92.55
• Working Capital = -25.54

For Mar’17

• Working Capital = 85.96 – 104.82
• Working Capital = -18.86

For Mar’16

• Working Capital = 77.94 – 21.22
• Working Capital = 56.72

For Mar’15

• Working Capital = 71.16 – 16.17
• Working Capital = 54.99

For Mar’14

• Working Capital = 63.33 – 18.51
• Working Capital = 44.82

Working Capital Turnover Ratio is calculated using the formula given below

Working Capital Turnover Ratio = Turnover (Net Sales) / Working Capital

For Mar’18

• Working Capital Turnover Ratio = 18.42 / (-25.54)
• Working Capital Turnover Ratio = -0.72

For Mar’17

• Working Capital Turnover Ratio = 31.73 / (-18.86)
• Working Capital Turnover Ratio = -1.68

For Mar’16

• Working Capital Turnover Ratio = 27.52 / 56.72
• Working Capital Turnover Ratio = 0.49

For Mar’15

• Working Capital Turnover Ratio = 41.95 / 54.99
• Working Capital Turnover Ratio = 0.76

For Mar’14

• Working Capital Turnover Ratio = 58.61 / 44.82
• Working Capital Turnover Ratio = 1.31

Interpretation

For the year March 2018, March 2017 Working Capital Turnover Ratio is negative which means that Company has not sufficient short term funds for fulfilling the sales done for that period. This will cause a shortage of funds and can cause a business to run out of money. This is alarming to the business.

For the year March 2016, 2015 and 2014 the company has positive Working Capital Turnover Ratio, which reflects the company has effective working capital management for sales done in that period.

Working Capital Turnover Ratio – Example #3

Alok Industries, Welspun India, Siyaram Silk, Orbit Exports and Black Rose Industries are peer company. Below are the Balance sheet and Turnover of the companies. Calculate the Working Capital Turnover Ratio and analyze the same.

With the help of the Balance Sheet, we have the following information.

Solution:

Working Capital is calculated using the formula given below

Working Capital = Current Assets – Current Liabilities

For Alok Industries

• Working Capital = 3,351.19 – 9,509.62
• Working Capital = -6,158.43

For Welspun India

• Working Capital = 2,499.51 – 1,418.50
• Working Capital = 1,081.01

For Siyaram Silk

• Working Capital = 989.31 – 325.73
• Working Capital = 663.58

For Orbit Exports

• Working Capital = 87.13 – 42.68
• Working Capital = 44.45

For Black Rose Ind

• Working Capital = 69.85 – 37.85
• Working Capital = 32

Working Capital Turnover Ratio is calculated using the formula given below

Working Capital Turnover Ratio = Turnover (Net Sales) / Working Capital

For Alok Industries

• Working Capital Turnover Ratio = 5,333.62 / (-6,158.43)
• Working Capital Turnover Ratio = -0.87

For Welspun India

• Working Capital Turnover Ratio = 4,976.59 / 1,081.01
• Working Capital Turnover Ratio = 4.60

For Siyaram Silk

• Working Capital Turnover Ratio = 1,731.66 / 663.58
• Working Capital Turnover Ratio = 2.61

For Orbit Exports

• Working Capital Turnover Ratio = 130.23 / 44.45
• Working Capital Turnover Ratio = 2.93

For Black Rose Ind

• Working Capital Turnover Ratio = 184.97 / 32
• Working Capital Turnover Ratio = 5.78

Interpretation

Siyaram Silk and Orbit Exports have the best Working Capital Turnover ratio with the sales done i.e 2.61 and 2.93.

With regards to Welspun India and Black Rose Ind, it is having the high Working Capital Turnover ratio which means that they have a good scope of increasing the sales or in other words, there is an underutilization of working capital.

Alok Industries have negative Working capital Turnover ratio, which means that the company can go out of funds if working capital is not increased with the given sales.

Explanation

Working Capital Turnover Ratio Formula can be interpreted as how much Working Capital is utilized for per unit of Sales. In other words, this ratio gives per unit of Working Capital for Sales done.

Higher the Working Capital Ratio reflects the company has sufficient working capital for sales done. It is to be noted that extreme high working capital also gives negative impact which means that there is a scope of increasing the sales with given Working Capital. For competitive analysis, the ratio is to be compared with other peer companies in the same Industry.

Lower the working capital turnover ratio reflects the company has poor management of working capital for sales done or the company’s inability to utilize the working capital efficiently. This impacts the Business in surviving in the long run.

Relevance and Uses of Working Capital Turnover Ratio

Working Capital Turnover Ratio Formula is used to determine the per unit utilization of Working Capital. This is very helpful as it helps the company to decide whether working capital utilization is done effectively or not which in turn helps a business to survive in the long run and helps to grow.

Working Capital Turnover Ratio Formula Calculator

You can use the following Working Capital Turnover Ratio Calculator

Recommended Articles

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