Working Capital Turnover Ratio Analysis

Definition: Working Capital Turnover Ratio is used to measure how effective the working capital is being used by the firm. If the ratio increases, then it means the company is efficiently utilizing its working capital.

Formula:
Working capital turnover ratio = Cost of sales / Average net working capital
Or,
Working capital turnover ratio = Net sales / Net working capital (Note: If cost of sales and opening balance of net working capital is not available)

Example 1:
CC Ltd. has the following data:
Cash $33,000
Bank $50,000
Trade Debtors $57,000
Stock $20,000
Trade Creditors $60,000
Cost of sales $180,000

Then:
Current Assets = 33,000 + 50,000 + 57,000 + 20,000 = $160,000
Net Working Capital = Current assets – Current liabilities = 160,000 - 60,000 = $100,000
Thus, the Working Capital Turnover Ratio = 180,000 / 100,000 = 1.8 times

Example 2:
Opening stock $36,000
Net working capital - Opening balance ($20,000); Closing balance ($15,000)
Purchases $42,000
Closing stock $6,000

Solution:
Average net working capital for the year = (Opening + Closing) / 2 = (20,000 + 15,000) / 2 = $17,500
Cost of sales = Opening stock + Net purchases - Closing stock = 36,000 + 42,000 - 6,000 = $72,000
Working capital turnover ratio = Cost of sales / Average networking capital = 72,000 / 17,500 = 4.1 times

* Next: Average Payment Period Ratio Analysis
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