A high working capital turnover ratio indicates that the company is cash rich and is utilizing its working capital efficiently. The company may even have short term debts. If the working capital ratio is low, it means the company is facing financial issues and the company is having insufficient funds for day to day operations. Some of the benefits of it are as follows: Indicator of Liquidity There are several benefits of using the working capital ratio for the company. The business should evaluate its operations and introduce more cost effective solutions Working capital turnover ratio is a crucial parameter which determines the status of the liquidity of a company. Significance of Working Capital Turnover Ratio It results in high inventory capital turnover ratio. In this case, the inventory level is lesser then the payables and hence the working capital is low. When the current assets are more than the current liabilities, the working capital of the company is positive. If the working capital turnover ratio of a company is high, it means that the company generates more revenue than its working capital. The working capital turnover ratio should be seen with other ratios be compared with industry standards to determine the correct financial position of the company. Interpretation of Working Capital Turnover Ratio Working Capital Turnover Ratio= Revenue/Average Working Capital= 614350/53811.5= 11.41 The working capital will be the average of beginning working capital and ending working capital= (129273-21650)/2= 53811.5 Ltd.īeginning working capital = (current assets- current liabilities) of March 2020 = 225112-246762= -21650Įnding working capital = (current assets- current liabilities) of March 2021= 353810-224537= 129273 Let us look into the data of a company, say, ABC Pvt. Working capital of the company = current Assets-current liabilities Now we will calculate the working capital turnover ratio, using the above data. Net annual sales of the company is $18.35 million. has $12.5 million of current assets and $3.25 million of current liabilities. It is obtained by dividing the net annual sales by the working capital of the company.ĪBC Pvt. Working capital ratio is an accounting ratio which determines how efficiently a business is utilizing its working capital to generate a given level of sales. Working Capital= Current Assets-Current Liabilities Working capital is the difference between current assets and current liabilities of a company.
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