Working Capital Turnover Ratio Calculator

To obtain further analysis of whether XYZ Co. has underperformed, the working capital turnover ratio of XYZ Co. must be compared with the industrial average as a whole. If the industrial average is close to 1.0, then it means that XYZ Co. has not underperformed but ABC Co. has significantly overperformed. Sometimes, a significantly higher working capital turnover ratio may also indicate something wrong. Assuming the companies are both in the same industry, ABC Co. has utilized its resources in the best way possible. Although the sales of ABC Co. are $5 million below the sale of XYZ Co., their working capital management has been exceptional. While XYZ Co. has an average working capital of $26 million, ABC Co. has been able to limit its working capital to $4 million which is a substantial difference.

Please review each lender’s Terms and Conditions for additional details. Suppose you are provided with the data of five companies, LG, Omega, Camron, Sky, and MG. You are required to calculate and interpret the working capital working capital ratio turnover ratio of all these five companies. The figure of net sales can be obtained from the statement of income and expenditure. Net sales mean the sum total of sales less sales return, discounts, etc., during the period.

What is the Working Capital Turnover Ratio?

Positive working capital is always a good thing because it means that the business is about to meet its short-term obligations and bills with its liquid assets. It also means that the business should be able to finance some degree of growth without having to acquire and outside loan or raise funds with a new stock issuance. This calculation gives you a firm understanding what percentage a firm’s current assets are of its current liabilities. On the surface, it appears that you are operating at very high efficiency, but in reality, your working capital level might be dangerously low. Very low working capital can possibly cause you to run out of money to fund your business.

• If successful, the company could immediately collect money from customers and reinvest it.
• The days sales of inventory gives investors an idea of how long it takes a company to turn its inventory into sales.
• Jen explains that net sales simply are sales minus any discounts and returns.
• It is always preferable to use average working capital for the computation of working capital turnover ratio.
• A high working capital turnover ratio shows a company is running smoothly and has limited need for additional funding.
• The working capital turnover ratio gives the number of times the working capital is turned over in a year.

Across ratios and compare it to the industry to analyze the formula well. The working capital for Hindalco for the two respective periods is 9634 and 9006. The below snapshot depicts the variables used to calculate this ratio. An excessively high turnover ratio can be spotted by comparing the ratio for a particular business to those reported elsewhere in its industry, to see if the business is reporting outlier results.

Modified Rebuy – Definition & Examples

The turnover ratio, in a nutshell, gauges the efficiency of a company at using its working capital. So analysts prefer to compare the turnover ratio with other companies in the market and derive valuable insights from them. On a scale, companies expect to generate a higher working capital turnover which indicates their ability to create more revenue compared to the cost spent. It helps the company to understand the relationship between working capital investment and revenue generation. Negative working capital is a giant red flag for a company as it means that the company is in financial trouble and management needs to act immediately to source additional funding.

The ratio can be used to evaluate the efficiency of a business in using its resources. The turnover of a business is its total revenue or sales it generates from selling products to its customers. The turnover of a business, for profit-making businesses, is one of the major indicators of a business’ performance and profit generation capacity.

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For example, management may decide to pay the supplier early to get the discount offered, thus saving more cash. Or, they decide to switch to another supplier which offers more lenient credit terms. And, if market demand remains high, insufficient working capital can cause the company to run out of money to fund its business and not optimize for high sales in the future.

To bring context and to see why this metric is so important for measuring business efficiency, let’s take a look at a few examples. It’s worth mentioning know that just because you have working capital at your disposal doesn’t guarantee that you’ll be using it effectively. Company A is using its working capital funds most efficiently, followed by Company B and then C. Yes, a companies working capital ratio can be negative if a companies Working Capital is negative.

Example of Working Capital Turnover Ratio

It measures how efficiently a business turns its working capital into increase sales. The working capital turnover ratio shows the connection between the money used to finance business operations and the revenue a business earns as a result. When a company does not have enough working capital to cover its obligations, financialinsolvencycan result and lead to legal troubles, liquidation of assets, and potential bankruptcy. The whole information for the computation of average working capital is available from the beginning and closing balance sheets. The working capital turnover ratio of XYZ Co. is below 1.0 and is not considered an ideal ratio because the working capital turnover is preferred above 1.0. This means that company is not using its resources efficiently to generate sales. Furthermore, it may also mean that the company is not managing its working capital properly.

Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider’s discretion. https://www.bookstime.com/ There is no guarantee you will be approved or qualify for the advertised rates, fees, or terms presented. The actual terms you may receive depends on the things like benefits requested, your credit score, usage, history and other factors.

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It indicates the capital that can directly be utilized to invest in expanding the company’s operations and to support its growth. If your company has a low ratio, this could be a sign that you’re spending on too many accounts receivable and inventory to support your sales. As such, you could end up with too much bad debt, or a load of obsolete inventory. Your working capital turnover ratio is typically considered high when it is greater than the turnover ratios of similar companies within the same industry.

• However, a very high ratio is not desirable as it may signal that the company is operating on low working capital w.r.t revenue from operations.
• If successful, the inventory is quickly released and replaced with new ones to meet high sales.
• The answer to certain tax and accounting issues is often highly dependent on the fact situation presented and your overall financial status.
• If you’re working with very low working capital funds, you may run out of money to fund your business.
• Analysts also compare the ratio of past years to understand the trends and suggest improvements where ever necessary.

If a business has a working capital turnover ratio of 10.0 but the industrial average is 9.0, then the above points can be ignored. As you can see, Kay’s WCR is less than 1 because her debt is increasing. If Kay wants to apply for another loan, she should pay off some of the liabilities to lower her working capital ratio before she applies. Calculate net working capital turnover ratio of a company having a net sales of $ 850 and net working capital of $ 724. Since Omega and MG have a very high ratio, this may be due to the underutilization of working capital. A company and its management, hence, carefully allocate funds in the short run too.

In the below working capital turnover ratio calculator enter the net sales and net working capital to calculate the turnover ratio. The company manages working capital less efficiently and generates less revenue. The company may overinvest in inventory and face an increase in accounts receivable, which causes an increase in obsolete inventory and an increase in bad debts.