Definition of Working Capital Turnover Ratio
The working capital turnover ratio is also referred to as net sales to working capital. It indicates a company’s effectiveness in using its working capital.
The working capital turnover ratio is calculated as follows: net annual sales divided by the average amount of working capital during the same year.
Example of Working Capital Turnover Ratio
To illustrate the working capital turnover ratio, let’s assume that a company’s net sales for the most recent year were $2,400,000 and its average amount of working capital during the year was $400,000. 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 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.
