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What is the 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 12 month period.

For example, if a company's net sales for a recent year were $2,400,000 and its average amount of working capital during the year was $400,000, its working capital turnover ratio was 6 ($2,400,000 divided by $400,000).

Working capital is defined as the total amount of current assets minus the total amount of current liabilities. As indicated above, you should use the average amount of working capital for the year of the net sales.

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 ratio.