## Working Capital Turnover Ratio

Working Capital Turnover Ratio is **used to determine the relationship between net sales and working capital of a business. **It shows the number of net sales generated for every single unit of working capital employed in the business.

Companies may perform different types of analysis such as trend analysis, cross-sectional analysis, etc. to find out effective utilization of its resources, in this case, working capital.

In a practical scenario, net sales may not be provided, which can then be calculated on the basis of **the cost of revenue from operations** or **cost of goods sold**. Working capital is calculated by subtracting **current liabilities** from **current assets**.

## Formula to Calculate Working Capital Turnover Ratio

**Net Sales** = Sales – Returns

**Working Capital** = Current Assets – Current Liabilities

(or)

**COGS** = Net Sales – Gross Profit (or) Opening Stock + Purchases – Closing Stock

## Example

**Question. **Calculate working capital turnover ratio from the following data.

Current Assets |
1,00,000 |

Current Liabilities |
50,000 |

Sales |
2,00,000 |

Sales Returns |
50,000 |

**Answer. **Net Sales = Sales – Sales Returns

Net Sales = 2,00,000 – 50,000

Net Sales = 1,50,000

Working Capital = Current Assets – Current Liabilities

WC = 1,00,000 – 50,000

WC = 50,000

**Working Capital Turnover Ratio = Net Sales/Working Capital**

= 1,50,000/50,000 = 3/1 or 3:1 or 3 Times

This shows that for every 1 unit of working capital employed, the business generated 3 units of net sales.

## High and Low Working Capital Turnover

**High** – A high ratio is desired, it shows a high number of net sales for every unit of working capital employed in the business. 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.

In case of a very high ratio, it is also certain that the company may not be able to meet the sudden increase in demand due to limited working capital.

**Low – **Lower working capital turnover ratio **means that the business is not generating sufficient sales** relative to the working capital employed.

A lower than the desired ratio shows that the working capital is not optimally used to generate sales & optimization may be required.

## Short Quiz for Self-Evaluation

>Read **Operating Profit Ratio**