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. If this company’s liabilities exceeded their assets, the working capital would be negative and therefore lack short-term liquidity for now. The calculation is usually made on an annual or trailing 12-month basis, and uses the average working capital during that period. A company has negative NWC if the equation produces a negative number or if its working capital ratio, which is current assets divided by current liabilities, is less than one. 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. 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 is current assets minus current liabilities. The working capital turnover ratio measures how well a company is utilizing its working capital to support a given level of sales. Should the company fail to complete the job, it may be forced to return capital back to the client.What is the Working Capital Turnover Ratio? ![]()
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