It looks like Red Company’s money works harder than Bue Company’s money is. The working capital turnover ratio is also referred to as net sales to working capital. Since GE and UTX are competitors, working capital turnover ratio can be used to compare their asset utilization. UTX is clearly using its investment in working capital more efficiently as indicated by its higher working capital turnover ratio when compared to GE’s ratio. Working Capital is calculated as Current Assets minus Current Liabilities. For 2023, the Current Assets were Rs. 4,25,396 and the Current Liabilities were Rs. 3,95,744.

How to Find the Working Capital Turnover Ratio of a Stock?

Finding out how much efficient working capital you can access through Capchase using our runway calculator. Explore Zebra BI’s expert-selected resources combining technology and insight for practical, in-depth BI strategies. Suppose a business had $200,000 in gross sales in the past year, with working capital turnover ratio $10,000 in returns. The NWC turnover ratio can be interpreted as the dollar amount of sales created for each dollar of working capital owned.

The working capital turnover ratio may also be misleading when a business is Accounts Payable are incredibly high. This may indicate that the company is having difficulty paying bills as they come due. Your working capital ratio is only a small piece of your overall financial health and profitability.

1. It is not particularly beneficial to compare the ratios of unrelated companies.
2. If working capital is net-positive, this puts the business in a position to grow and reinvest in the organization.
3. Working Capital is determined by subtracting Current Liabilities from Current Assets.
4. Let us try to understand how to calculate the working capital turnover of Hindalco.
5. The working capital turnover ratio doesn’t consider profitability directly, focusing solely on the relationship between sales and working capital.
6. For the past two years, you’ve been bringing in $10,000 per month and kept operations lean by working as a solopreneur and using older equipment.
7. A third use of the working capital turnover ratio is for comparison against competitors or industry averages.

Accounting Ratios

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

What Does High Working Capital Say About A Company?

Improving working capital management can help improve the ratio, and businesses can do this in several ways, including speeding up inventory turnover, reducing payment terms or switching to prompt payment discounts. Adopting better cash management practices can also help improve working capital management which can lead to a higher efficiency ratio. One of the most effective ways of using the working capital turnover ratio to measure business efficiency is by comparing it with the industry average. Comparing to the industry average enables businesses to set benchmark targets and aim to exceed them by making continuous improvements in working capital management. Working capital turnover ratio is an important financial metric that measures how efficiently a company is using its working capital to generate sales revenue. A high working capital turnover ratio indicates that a company is effectively using its working capital to generate sales, while a low ratio suggests that the company may be inefficiently using its working capital.

1. In particular, comparisons among different companies can be less meaningful if the effects of discretionary financing choices by management are included.
2. More often than not, a high working capital turnover is a good sign for a company as it means that the operation of the company is efficient.
3. Understanding the formula for WCTR is essential for businesses to assess their operational performance and identify areas for improvement.
4. The other bonus is that the available capital is based on a percentage of your ARR and therefore will grow as you do, so you don’t need to continually renegotiate terms.
5. For example, a company’s assets, such as its accounts receivable, could be overstated to make its financial picture look more appealing.
6. A high ratio indicates that a company is generating sales efficiently using the working capital invested in the business.

The term working capital refers to the net liquid assets of a business used in it’s normal day to day trading operations. In more general terms it can be defined as current assets less current liabilities. To manage how efficiently they use their working capital, companies use inventory management and manage accounts receivables and accounts payable. Inventory turnover shows how many times a company has sold and replaced inventory during a period, and the receivable turnover ratio shows how effectively it extends credit and collects debts on that credit. The main use of the working capital turnover ratio is to measure the efficiency of a company’s use of working capital to generate sales revenue.

The ratio indicates the extent to which current assets are sufficient to satisfy its current liabilities. A higher ratio suggests that current assets are generating enough revenue to satisfy short-term debt. Net Sales is the total revenue generated by the company from its operations during a period. Working Capital is the difference between current assets and current liabilities. Average Working Capital is calculated by taking the average of the working capital at the beginning and end of an accounting period, usually a year. Several factors can affect working capital turnover ratio, including the time it takes for a company to convert inventory into sales, the company’s payment terms, and the cash conversion cycle.

Example of Working Capital Turnover Ratio

Not only is it simple to calculate, but it gives a very clear indication of how well your working capital is being used to increase your sales and grow your revenue. The other bonus is that the available capital is based on a percentage of your ARR and therefore will grow as you do, so you don’t need to continually renegotiate terms. If you want to learn other indicators relevant to the evaluation of the financial condition of a company, check our debt to asset ratio calculator or operating cash flow calculator. The working capital turnover ratio doesn’t consider profitability directly, focusing solely on the relationship between sales and working capital. Also, it may not reflect the company’s performance accurately if the sales and working capital levels fluctuate significantly during the measurement period.

For instance, retailers and other seasonal enterprises experience huge swings in inventory and receivables during prime seasons. Reviewing the cash flow statement offers a more comprehensive understanding of the timing of working capital changes. In summary, mastering the WCTR empowers financial analysts, managers, and investors to make informed decisions. By optimizing working capital, companies can enhance profitability, liquidity, and overall financial health. Remember that while numbers provide insights, the real magic lies in strategic actions taken to improve the WCTR and drive sustainable growth.

Lower working capital turnover is an indicator that operations are not being run efficiently (your business may be investing in too many accounts receivable or inventory and fewer sales per working capital spent). In the world of startups and SaaS business, there are several markers a company can look to in order to determine how successful it is. Before we dive into understanding the metric, let’s talk about what working capital is. Working capital is the amount of money the company has to support its daily operations.

While deducing a good ratio, it is important to note that the ratios are industry specific. Different sectors have different benchmarks, thus a ratio that’s good for one industry might not weigh the same for another sector or industry. In this comprehensive exploration of the Working capital Turnover ratio (WCTR), we’ve delved into the intricacies of this financial metric that plays a crucial role in assessing a company’s operational efficiency.

He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.