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Shows how well a company can generate sales from its working capital.[sc:kit02 ]
Working Capital Turnover Formula
Explanation of Working Capital Turnover
The Working Capital Turnover ratio measures the company’s Net Sales from the Working Capital generated. Note that another ratio exists, the Sales to Working Capital Ratio also measures Net Sales to Working Capital. We chose to interchange the usual components of Working Capital (Total Current Assets – Total Current Liabilities) with an alternate method (shown above). With two similar ratios using slightly different methods to compute Working Capital, plotting both of these ratios together to see their differences would be wise.
Importance of Working Capital Turnover
A high, or increasing Working Capital Turnover is usually a positive sign, showing the company is better able to generate sales from its Working Capital. Either the company has been able to gain more Net Sales with the same or smaller amount of Working Capital, or it has been able to reduce its Working Capital while being able to maintain its sales. Efforts to streamline the operations of the company will often show favorably in this ratio.