![]() Related: What Are Liquidity Ratios? Definition and Example Increase overall financial health This ensures that you know where your cash is going and how to properly allocate it for maximum management and efficiency. Incorporating working capital management into a business plan can help you stay aware of the status of an organization's accounts payable, accounts receivable and debt and stock management. When a company does not stay on top of its working capital turnover ratio, it may experience insufficient funds for day-to-day operations and short-term debts. Staying aware of an organization's working capital turnover ratio can: Guarantee liquidity Several advantages using a working capital turnover ratio can provide for a business. A ratio of 1.5 to two indicates good liquidity and can help the organization understand its areas of financial success.Īdvantages of the working capital turnover ratio If an organization had a ratio of 0.5, it might evaluate its operations to determine more cost-effective operational solutions. Analyze the ratioĪ working capital turnover ratio of less than one can indicate potential future liquidity problems. Related: Net Sales: Definition and How To Calculate It 3. This calculation yields a working capital turnover ratio of two. You would take the net annual sales of $16 million and divide it by the working capital of $8 million. Using the same example from step one, imagine that the company has net annual sales of $16 million dollars. Working capital turnover ratio = Net annual sales / Working capital The next step is to use the following formula to determine the working capital turnover ratio: Use the working capital turnover ratio formula Related: Learn How To Calculate Liabilities 2. ![]() Working capital = Current liabilities - Current assets For example, if a company has $10 million in current assets and $2 million in current liabilities, its working capital would be $8 million. You can calculate working capital by subtracting a company's current liabilities from its current assets. Here's how to calculate a working capital turnover ratio: 1. Related: Learn About Being a Finance Manager How to calculate a working capital turnover ratio It can also determine if a company is able to pay off its debt in a set period and ensure it doesn't run out of cash as a result of increased production requirements. Lower working capital turnover is an indicator that there are opportunities for operational improvements.Ī working capital turnover ratio is common for determining a company's financial performance and analyzing its overall operations. This metric gives a company an accurate idea of the money it has available to put towards operations after meeting obligations such as debt payments.Ĭompanies with higher working capital turnover ratios are more efficient in running operations and generating sales. A working capital turnover ratio is important for any business but can be especially crucial for small businesses. In this ratio, working capital refers to the operating funds a company uses in day-to-day operations.Īnother term for this metric is net sales to working capital. What is the working capital turnover ratio?Ī working capital turnover ratio is a metric that calculates how efficiently a company uses working capital to generate sales. Fixed asset turnover and total asset turnover ratio should be used in such scenarios. In such a situation working capital turnover ratio is not very useful. 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.ĪMZN on the other hand is not a competitor of GE or UTX so comparison between GE/UTX and AMZN based on working capital turnover ratio is not appropriate.įurther, AMZN's industry and its market position is such that it can maintain very low working capital. Since GE and UTX are competitors, working capital turnover ratio can be used to compare their asset utilization. The following schedule contains the required calculations: ![]() Relevant extracts from their financial statements are given below. Opening Working Capital + Closing Working CapitalĬalculate and analyze the working capital turnover ratios of General Electric (NYSE: GE), United Technologies Corporation (NYSE: UTX) and Amazon Inc. Working Capital = Current Assets − Current Liabilities Average Working Capital generating more revenue using less investment. It means that the company is utilizing its working capital more efficiently i.e. Working capital is defined as the amount by which current assets exceed current liabilities.Ī higher working capital turnover ratio is better. Working capital turnover ratio is an activity ratio that measures dollars of revenue generated per dollar of investment in working capital.
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