Definition of Working Capital Turnover Ratio
The working capital turnover ratio (WCTR) gives the number of times the working capital is turned over in a year. The number indicates effectiveness in the utilization of working capital such that a higher ratio indicates efficient utilization of working capital and vice versa. The ratio is used to determine the relationship between the funds and the sales of the Company.
Formula
where,
Working Capital = Current Assets − Current Liabilities
Average Working Capital = (Beginning Working Capital + Ending Working Capital) / 2
Examples of Working Capital Turnover Ratio (With Excel Template)
Let’s take an example to understand the Working Capital Turnover Ratio calculation in a better manner.
Example #1
Calculate the working capital turnover ratio of a Company ABC Inc., which has a net sales of $ 100,000 over the past twelve months, and the average working capital of the Company is $ 25,000.
Solution:
Working Capital Turnover Ratio is calculated using the formula given below
Working Capital Turnover Ratio = Net Sales / Average Working Capital
- WCTR = $100,000 / $25,000
- WCTR = 4
Example #2
Calculate and analyze the working capital turnover ratios of the three companies A, B, and C, for 2019. The numbers are in $ Millions.
Solution:
The following schedule contains the required calculations:
Working Capital Turnover Ratio is calculated using the formula given below
Working Capital = Current Assets − Current Liabilities
It is calculated using the formula given below
Working Capital Turnover Ratio = Net Sales / Average Working Capital.
Company A is using its working capital funds most efficiently, followed by Company B and then C.
Example #3
Consider the balance sheet and Income statement for Apple Inc.
Source Link: Apple Inc. Balance Sheet
Solution:
Beginning Working Capital (2018) is Calculated as
Beginning Working Capital = Total Current Assets − Total Current Liabilities
- Beginning Working Capital = $131,339 – $116,866
- Beginning Working Capital = $14,473
Ending Working Capital (2017) is calculated as
Ending Working Capital = Total Current Assets − Total Current Liabilities
- Ending Working Capital = $128,645 – $100,814
- Ending Working Capital = $27,831
The average Working Capital of Apple Inc.is calculated using the formula given below.
7 Online Courses | 25+ Hours| Verifiable Certificate of Completion| Lifetime Access
4.5
View Course
Average Working Capital = (Beginning Working Capital + Ending Working Capital) / 2
- Average Working Capital = ($14,473 + $27,831) / 2
- Average Working Capital = $21,152
WCTR is calculated using the formula given below
WCTR= Net Revenue from Operation (Sales) ÷ Average Working Capital
- WCTR = $59,531/ $21,152
- WCTR = 2.81
Advantages
- The ratio gives an indication of the operations of the Company
- The ratio helps the management to make an informed decision on raising of funds and utilization of the Company’s resources
- The management can decide on business expansion if it feels they have enough funds to continue its operations and build new resources.
Important Points
- WCTR measures the revenue of the Company from the working capital funds available with it.
- It helps the company to understand the relationship between working capital investment and revenue generation.
- The ratio provides an efficiency number on how the Company is run and the management manages the funds.
- A higher ratio indicates that the Company is efficiently managed, and it provides a competitive edge to the Company against its promoters.
- However, a very high ratio of ~80% may indicate that the Company does not have enough funds to support the growth in its sales, further indicating the prospects of the Company being insolvent in the near future due to higher account payables.
- A lower ratio may indicate Company having higher account receivables or inventory assets. High account receivables have credit risk, and higher inventory has a risk of going stale, which is not good for sales.
Conclusion
The (WCTR) is a significant indicator of the efficiency of the Company and how well it is doing compared to the competitors. The (WCTR) gives an indication of efficiency in the utilization of the working capital. The analysts and the Company’s management often look at this ratio while doing business analysis. If the ratio is too high or too low than the industry’s average ratio, they should look for outliers in the company’s financials to make informed decisions.
Recommended Articles
This is a guide to Working Capital Turnover Ratio. Here we discuss how to calculate WCTR along with practical examples. We also provide a downloadable excel template. You may also look at the following articles to learn more-
