This ratio is also known as net sales to working capital and shows the relationship between the revenue generated by the company and the funds needed to generate this revenue. Calculate the working capital turnover ratio of a Company ABC Inc. which has a net sales of \$ 100,000 over the past twelve months and the average working capital of the Company is \$ 25,000. 5 to 2.0: Short-term liquidity is optimal. 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. Hence, Working Capital Turnover ratio is 2.88 times which means that for every sale of unit 2.88 Working Capital is utilized for the period. The working capital ratio can be misleading if a company’s current assets are heavily weighted in favor of inventories, since this current asset can be difficult to liquidate in the short term. It shows the number of net sales generated for every single unit of working capital employed in the business. Liquidity problems are likely in the near or immediate future. As such, the ratio is a good indicator of company growth and liquidity and is calculated as follows: Working capital turnover = net sales working capital. The higher your working capital turnover ratio is, the more efficient you are in using working capital to generate sales, but a very high working capital turnover ratio can show that a company does not have enough capital to support its sales growth. Working Capital Turnover Ratio – Example #2. The working capital turnover is the ratio that helps to measure a company's efficiency in using its working capital to support sales. Equity Turnover Ratio. The working capital turnover ratio is an activity ratio that measures how many times working capital is used to generate sales, ie revenue, during a specific time period. A working capital ratio can be evaluated as follows: Less than 1.0: A company cannot meet its current financial obligations. For example, in the case of Johnson & Johnson, you'd take 1 ÷ .46 to arrive at 2.17. Working Capital Turnover . A higher working capital turnover ratio is better. Like the working capital turnover ratio, the equity turnover ratio looks at how efficiently a business is using its value — in this case, equity — to drive construction revenue. Higher the capital turnover ratio better will be the situation. Working Capital Turnover. Solution: Working Capital Turnover Ratio is calculated using the formula given below Working capital is defined as the amount by which current assets exceed current liabilities. Some analysts prefer to invert working capital per dollar of sales into a financial metric known as working capital turnover. This may also be referred to as a negative working capital ratio. Formula to calculate capital turnover ratio = Sales/ Capital Employed From the Balance Sheet of Bill Energy Limited (Listed Company), Calculate the Working Capital Turnover Ratio for Five Years and Interpret the same. Companies may perform different types of analysis such as trend analysis, cross-sectional analysis, etc. Another common efficiency ratio and capacity ratio is the equity turnover ratio. Working Capital Turnover Ratio. This problem is most obvious if there is a low inventory turnover ratio . 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. Working Capital Turnover Ratio is used to determine the relationship between net sales and working capital of a business. 5. It’s calculated by dividing sales by total equity. To calculate working capital turnover, you take the working capital per dollar of sales and divide it into one. 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