The analysts and the Company’s management often look at this ratio while doing business analysis. The (WCTR) gives an indication of efficiency in the utilization of the working capital. The (WCTR) is a significant indicator of the efficiency of the Company and how well it is doing compared to its competitors. High account receivables have credit risk, and higher inventory has a risk of going stale, which is not good for sales. This can be beneficial in terms of having high. A lower ratio may indicate Company has higher account receivables or inventory assets. A low working capital ratio, usually below 1, indicates that current liabilities exceed current assets.However, a very high ratio of ~80% may indicate that the Company does not have enough funds to support the growth in its sales, further indicating the prospects of the Company being insolvent in the near future due to higher account payables.A higher ratio demonstrates the company’s efficiency and gives it a competitive edge over rivals.The ratio provides a gauge for the efficiency with which the business is run and its financial management is carried out.It helps the company to understand the relationship between working capital investment and revenue generation.WCTR measures the revenue of the Company from the working capital funds available with it.including average collection period, inventory turnover in days, average. The management can decide on business expansion if it feels they have enough funds to continue its operations and build new resources. profitability, whereas a low level of current assets may lead to lower levels.The ratio helps the management to make an informed decision on raising funds and utilization of the Company’s resources.The ratio gives an indication of the operations of the Company.Net sales ÷ ((Beginning working capital + Ending working capital) / 2) Example of the Working Capital Turnover RatioĪBC Company has $12,000,000 of net sales over the past twelve months, and average working capital during that period of $2,000,000.WCTR= Net Revenue from Operation (Sales) ÷ Average Working Capital Retail companies need lower working capital as they generate short-term funds faster because of daily interactions with customers. So, these businesses may need more working capital. The ratio means that the companys sales numbers are four times the size of its working capital. For example, manufacturing businesses with longer production cycles don’t have quick inventory turnover like retail companies. The calculation is usually made on an annual or trailing 12-month basis, and uses the average working capital during that period. If a company’s net sales for 2011 were 100,000 and its average monthly working capital during the year was 50,000, its working capital turnover ratio was 4 (100,000 divided by 50,000). To calculate the ratio, divide net sales by working capital (which is current assets minus current liabilities). Conversely, a low ratio indicates that a business is investing in too many accounts receivable and inventory assets to support its sales, which could eventually lead to an excessive amount of bad debts and obsolete inventory write-offs. Working capital turnover is defined as a ratio that measures how effectively a company utilizes its working capital to support its sales and revenue growth. A high turnover ratio indicates that management is being extremely efficient in using a firm's short-term assets and liabilities to support sales. Working capital ratios between 1.2 and 2.0 indicate a company is making effective use of its assets. A working capital ratio of less than one means a company isn’t generating enough cash to pay down the debts due in the coming year. Working capital is current assets minus current liabilities. It’s calculated as current assets divided by current liabilities. The working capital turnover ratio measures how well a company is utilizing its working capital to support a given level of sales. What is the Working Capital Turnover Ratio?
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