We have prepared this working capital turnover ratio calculator for you to calculate the working capital turnover ratio of any business you like. The working capital turnover ratio formula tells you how much revenue a company can generate given its average working capital. This ratio indicates the efficiency of a company at generating sales.

The following article will help you understand what working capital turnover ratio is and how to calculate it using the working capital turnover formula. We will also demonstrate some practical examples to better help you to understand the metric.

What is the working capital turnover ratio? The working capital turnover ratio meaning

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. It is one of the most critical elements within a company's operation, as poor working capital management may lead to disaster.

The working capital turnover ratio is a metric that helps us analyze the efficiency of the company in generating revenue using its working capital. By dividing revenue by the average working capital, this ratio is able to link the revenue-generating ability to the efficiency of a company's daily operation.

We can see this in action in the next section where we analyze the working capital turnover ratio formula example.

How to calculate working capital turnover? Applying the working capital turnover ratio formula

Now, let's take a look at Company Alpha to understand the working capital turnover formula. Company Alpha reports:

  • Revenue: $8,000,000;
  • Opening current assets: $3,000,000;
  • Closing current assets: $2,000,000;
  • Opening current liabilities: $1,000,000; and
  • Closing current liabilities: $800,000.

The working capital turnover ratio calculator involves four steps:

  1. Determine the revenue

You can find the revenue of a company in its income statement. It is usually stated in the first line of the income statement. Company Alpha's revenue is $8,000,000.

  1. Calculate the average current assets and average current liabilities

Next, we need to calculate the average current assets and the average current liabilities. We can calculate these using the following formulae:

average current assets = (starting current assets + closing current assets) / 2

average current liabilities = (starting current liabilities + closing current liabilities) / 2

The average current assets for Company Alpha is ($3,000,000 + $2,000,000) / 2 = $2,500,000.

The average current liabilities for Company Alpha is ($1,000,000 + $800,000) / 2 = $900,000.

  1. Calculate the average working capital

The next step is to calculate the average working capital using the formula below:

average working capital = average current assets - average current liabilities

Thus, in our example, the average working capital for Company Alpha is equal to $2,500,000 - $900,000 = $1,600,000.

  1. Calculate the working capital turnover

This is the final step - calculating the working capital turnover using the working capital turnover formula shown below:

working capital turnover = revenue / average working capital

Hence, the working capital turnover for Company Alpha is $8,000,000 / $1,600,000 = 5x.

If keeping track of all these variables sounds complicated to you, don't worry, just put all the numbers into our working capital turnover ratio calculator to get your answer.

Interpreting results from the working capital turnover ratio calculator

After discussing the working capital turnover ratio meaning and how to calculate the working capital turnover ratio, let's take some time to talk about how we should interpret the results:

  • The working capital turnover ratio helps us to assess the efficiency of a company's operation, in particular working capital management. Working capital management is a practice that involves monitoring current assets, current liabilities, and cash flow to make sure that the company's operation can run smoothly.

  • A high working capital turnover indicates that the working capital management of the company is efficient. It means that it can generate more revenue per working capital.

  • However, knowing how to calculate working capital turnover isn't enough. A working capital turnover that is extraordinarily high may not be suitable in certain situations. For instance, an extremely high working capital turnover ratio may indicate that a company does not have enough working capital to support its growth, and hence needs to further raise funds from investors. It may also mean that the company has very high accounts payable, which signifies the company's inability to pay its bills.

FAQ

Can the working capital turnover be negative?

Mathematically speaking, the working capital turnover can be negative. This can happen when the average current assets are lower than the average current liabilities.

As working capital is the money a company uses to run its daily operation, a company with negative working capital is not likely to last long.

What is working capital?

Working capital is the money in the business that is used to run its daily operations. It is also defined as the difference between the average current assets and the average current liabilities.

What is a good working capital turnover ratio?

The dynamics of working capital turnover are different for different industries. Thus, it is critical to compare the working capital turnover against its peers' average instead of the market average.

Is a high working capital turnover good?

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.

However, when a company's working capital turnover is significantly higher than its peers, there is a chance that the company does not have enough working capital to support its growth.

How do I use the working capital turnover ratio formula?

You can calculate the working capital turnover ratio in 4 steps:

  1. Determine the revenue.
  2. Calculate the average current assets and average current liabilities.
  3. Calculate the average working capital, which is the difference of the values from the previous step.
  4. Apply the working capital turnover ratio formula:

working capital turnover = revenue / average working capital

Wei Bin Loo
Average current assets
Opening current assets
$
Closing current assets
$
Average current assets
$
Average current liabilities
Opening current liabilities
$
Closing current liabilities
$
Average current liabilities
$
Working capital turnover
Average working capital
$
Revenue
$
Working capital turnover
x
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