Working capital turnover indicates how much revenue the company generates for every Rs 1 invested in working capital
Working Capital Turnover = Net Sales / Working Capital
Company ABC has a working capital of Rs 100 Cr and a Sales of Rs 1000 Cr. Then, the working capital turnover is 36.5
For every Rs 1 invested in working capital, the company generates sales of Rs 36.5.
How to use practically
The working capital turnover ratio measures how well a company is utilizing its working capital to support a given level of sales. Working capital is current assets minus current liabilities.
A high turnover ratio indicates that management is being extremely efficient in using a firm’s s current assets and liabilities to grow sales.
Conversely, a low ratio indicates that a business is investing in too many accounts receivable and inventory assets to grow its sales. If this ratio is very low, the company will be forced to take a working capital loan from the banks which will add further pressure on the management. This situation generally arises when the management is not able to convert the inventory into sales and not able to collect the money back from the creditors.
The best way to use Working Capital Turnover Ratio is to track how the ratio has been changing over time and to compare it to other companies in the same industry.
Working capital management is the single most factor to determine the strength of business and management mainly in small and mid-cap companies. Companies that are able to manage working capital very well will definitely grow into large-cap companies.