Working Capital Turnover Ratio: Meaning, Formula, and Example

Typically speaking, a high working capital turnover ratio may give you a Competitive Edge in your industry. Because it indicates you use your working capital more times every year, the idea is that money is flowing in and out of your business quite well. Because of this, you have more spending flexibility which helps to avoid financial trouble. If you experience a higher demand for all your products, you are not as likely to suffer inventory shortages that sometimes accompany rising sales.

The NWC turnover metric can be a useful tool for evaluating how efficiently a company is utilizing its working capital to produce more revenue. The average Working Capital of Apple Inc.is calculated using the formula given below. Carbon Collective is the first online investment advisor 100% focused on solving climate change. We believe Sales To Working Capital And Capital Turnover Ratio that sustainable investing is not just an important climate solution, but a smart way to invest. Go a level deeper with us and investigate the potential impacts of climate change on investments like your retirement account. Management should be cognizant of the problems that can arise if it attempts to alter the outcome of this ratio.

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Next, you can find the net sales information hidden in the 10-k, in the sections labeled for different customer segments—consumer, pharmaceutical, and medical. Manufacturing companies might run a higher ratio, while service providers may not. In particular, comparisons among different companies can be less meaningful if the effects of discretionary financing choices by management are included.

• The metric is meant to help you compare how efficient your operations are to your competitors or others in your industry.
• If you’re working with very low working capital funds, you may run out of money to fund your business.
• The sale to working capital ratio is a metric used to determine how well a company is utilizing its current assets and liabilities.
• The (WCTR) is a significant indicator of the efficiency of the Company and how well it is doing compared to its competitors.
• However, this can result in reduced sales when the company’s payment terms become unattractive to clients.
• A low turnover ratio in turn implies that the return on working capital expenditure is low.

Blue Company, on the other hand, had $500,000 in sales and $125,000 in working capital. Blue Company spent its working capital only four times throughout the https://kelleysbookkeeping.com/what-is-the-materials-usage-variance/ year to generate the same level of sales as Red Company. It means that the capital is flowing in and is being spent on activities to generate more revenue.

What is Working Capital Turnover Ratio?

That is the company generates a high revenue price for each dollar of working capital spent. Working Capital refers to the difference between a company’s current assets and its current liabilities. Here, assets can be cash, receivable income like customer’s unpaid bills, and stocked inventory of raw materials and finished goods. However, such comparisons are meaningless when working capital turns negative because the working capital turnover ratio then also turns negative. A high turnover ratio shows that management is being very efficient in using a company’s short-term assets and liabilities for supporting sales.