Working Capital Turnover Ratio is used to determine the relationship between net sales and working capital of a business. Companies may perform different types of analysis such as trend analysis, cross-sectional analysis, etc. Higher the capital turnover ratio better will be the situation. Working Capital Turnover . Equity Turnover Ratio. The working capital ratio can be misleading if a company’s current assets are heavily weighted in favor of inventories, since this current asset can be difficult to liquidate in the short term. 5 to 2.0: Short-term liquidity is optimal. The working capital turnover is the ratio that helps to measure a company's efficiency in using its working capital to support sales. This ratio is also known as net sales to working capital and shows the relationship between the revenue generated by the company and the funds needed to generate this revenue. A working capital turnover ratio is generally considered high when it is greater than the turnover ratios of similar companies in the same industry. As with most financial ratios, you should compare the working capital turnover ratio to other companies in the same industry and to the same company's past and planned working capital turnover ratios. A working capital ratio can be evaluated as follows: Less than 1.0: A company cannot meet its current financial obligations. Therefore, its working capital turnover ratio was: net sales of $2,400,000 divided by average working capital of $400,000 = 6 times during the year. As such, the ratio is a good indicator of company growth and liquidity and is calculated as follows: Working capital turnover = net sales working capital. 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. A high capital turnover ratio indicates the capability of the organization to achieve maximum sales with minimum amount of capital employed. The higher your working capital turnover ratio is, the more efficient you are in using working capital to generate sales, but a very high working capital turnover ratio can show that a company does not have enough capital to support its sales growth. From the Balance Sheet of Bill Energy Limited (Listed Company), Calculate the Working Capital Turnover Ratio for Five Years and Interpret the same. Working Capital Turnover Ratio. Some analysts prefer to invert working capital per dollar of sales into a financial metric known as working capital turnover. Liquidity problems are likely in the near or immediate future. The working capital turnover ratio is an activity ratio that measures how many times working capital is used to generate sales, ie revenue, during a specific time period. 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. It’s calculated by dividing sales by total equity. Working Capital Turnover Ratio – Example #2. This may also be referred to as a negative working capital ratio. A higher working capital turnover ratio is better. 5. It shows the number of net sales generated for every single unit of working capital employed in the business. This problem is most obvious if there is a low inventory turnover ratio . Like the working capital turnover ratio, the equity turnover ratio looks at how efficiently a business is using its value — in this case, equity — to drive construction revenue. Another common efficiency ratio and capacity ratio is the equity turnover ratio. Working capital turnover ratio is an activity ratio that measures dollars of revenue generated per dollar of investment in working capital. 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