![]() ![]() The working capital turnover ratio should be carefully interpreted because a very high ratio may also be a sign of insufficient quantity of working capital in the business. The ratio should be compared with the previous years’ ratio, competitors’ or industry’s average ratio to have a meaningful idea of the company’s efficiency in using its working capital. Generally, a high working capital turnover ratio is better. A low ratio indicates inefficient utilization of working capital during the period. It means each dollar invested in working capital has contributed $2.14 towards total sales revenue. The working capital turnover ratio of Exide company is 2.14. Required: Compute working capital turnover ratio of Exide from the above information. ![]() Current liabilities on January 1, 2016: $140,000.The following information has been extracted from Exide company: However if only closing balances of current assets and current liabilities are known and beginning working capital cannot be determined, the working capital at the end of the period (closing working capital) may be used as denominator of the formula.įor more explanation consider the following example: Example: Note for students: It is always preferable to use average working capital for the computation of working capital turnover ratio. The whole information for the computation of average working capital is available from the beginning and closing balance sheets. Working capital turnover ratio plus#Working capital is equal to current assets minus current liabilities and average working capital is equal to working capital at the start of the period plus working capital at the end of the period divided by 2. They argue that cost of goods sold has a more direct relation to the efficiency with which working capital is used in the business. Some analysts prefer to use cost of goods sold (COGS) rather than net sales as numerator of the formula. Net sales are equal to gross sales less any sales returned by customers during the period. The formula consists of two components – net sales and average working capital. It shows company’s efficiency in generating sales revenue using total working capital available in the business during a particular period of time. For example, if a company makes 10 million in sales during a calendar. Information about your total liabilities and your total assets can typically be found on your balance sheet. Working capital turnover ratio is computed by dividing the net sales by average working capital. As a reminder: working capital is calculated by subtracting a company’s total liabilities & debts from its total assets. ![]()
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