![]() As important as these metrics are, non-financial factors like stakeholder diversity, quality of services, utilisation of resources, and management team also play a role in influencing a company’s financial health. Cons of working capital turnover ratioĪ working capital turnover ratio only considers a company’s most prominent metrics like profitability, growth, liquidity, indebtedness, and stability. Corrective measures can then be undertaken to address liquidity gaps, if any. As the ratio helps analyse net sales and working capital requirements, the liquidity and profitability can easily be tracked. When an organisation cannot maintain steady working capital, it may experience a slowdown. ![]() A company’s overall financial health can be improved by efficiently identifying how to use cash profitably.īy keeping the managers informed on the company’s working capital turnover ratio, funds can be utilised more efficiently, minimising disruptions. There are several benefits of using a working capital turnover ratio, some of which include:Ī working capital turnover ratio can help control the cash flow and analyse the inflow. Using this approach, companies, stakeholders and investors can determine the true operational efficiency of a company. The right way to leverage the working capital turnover ratio is by tracking how it has been fluctuating over time and comparing it with companies in the same industry. A low or negative working capital ratio means a company might be investing highly in inventory and accounts receivable to generate sales, which can lead to excessive obsolete inventory or bad debts.įurthermore, working capital turnover is crucial for any business, especially small ventures, as it displays the relationship between the resources used to finance the company’s operations and its revenue. The more sales a company makes, the higher profitability they register, which naturally helps boost the working capital turnover ratio.Īnalysis of this ratio can enable companies to utilise their resources and working capital better. What does the working capital turnover ratio indicate ?Ĭalculating the working capital turnover ratio depicts how effectively a company employs its resources. Apart from this, there are 200+ filters that can help you in analysing a stock better. Open the Stock Screener, click on ‘Add Filter’ and search for ‘Working Capital Turnover Ratio’. Use Tickertape Stock Screener to find the working capital turnover ratio of a stock. ![]() Working Capital = Current assets – Current liabilities Net Sales = Cost of goods sold + Gross profit ![]() The working capital turnover ratio would then be calculated as follows – Gross profit – 1/3 rd of revenue from operations Assume the following details of a company Let’s understand this ratio with a simple example. Thus, the management can take necessary measures to improve its sales and enable growth and development. For instance, a low working capital turnover ratio could imply lower sales than expected. Net sales = Gross revenue – Sales return – Discount – Allowancesįor the management of any company, it is imperative to calculate the working capital turnover ratio, as it helps them ascertain the company’s ability to utilise its current funds in facilitating its turnover. Working capital turnover ratio = Cost of goods sold/Working capital Working capital turnover ratio = Net sales/Working capital It can also help to see if a company can pay off the debt in a stipulated period without falling short of funds in times of higher production requirements. In that case, what does a negative working capital turnover ratio mean? It indicates that a company’s operational capacity is not too efficient.Īll in all, a working capital turnover ratio is a great tool to measure a company’s financial and operational performance. Understanding the working capital turnover ratio gives a company an idea of the money it has handy to spend on operations and essential payments once all the debt instalments and bills are paid.Ĭompanies with higher working capital ratios are perceived to be efficient in generating sales and running operations. The main components of this ratio are net sales, cost of goods sold, and working capital. Working capital points toward the relationship between the capital used for financing day-to-day operations and the results the company generates. The working capital turnover ratio measures the efficiency with which a company uses its assets to support sales and business growth. What is the working capital turnover ratio? What does the working capital turnover ratio indicate?.How to calculate the working capital turnover ratio?.Working Capital Turnover Ratio: Quick Notes.What is the working capital turnover ratio?.
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