Here are other formulas you may use to calculate the ratio: Working capital turnover = Net annual sales / Average working capital The formula for calculating net sales to working capital ratio is: Typically, a company calculates the ratio based on a calendar year. This means that the overall working capital decreases, affecting the ratio calculations. For instance, when a company pays off a loan of ₹50,000, this decreases the company's current liabilities by ₹50,000. Related: What Is Working Capital Management? (Importance And Ratios) Formula For Calculation Of The Working Capital Turnover RatioĬertain factors affect a company's net sales to working capital ratio, such as current liabilities and current assets changes. The ratio determines how efficiently the company can pay off its debts in a set period and avoid running out of cash due to increased production. It helps investors determine the company's financial performance and overall operations. A lower ratio shows that the company cannot run its operations efficiently. If the working capital rises too high, it suggests the company requires raising additional capital to support growth. ![]() A higher ratio shows that a company generates higher sales. This ratio helps investors measure how effective a business is at generating sales for every rupee of working capital. The ratio shows the relationship between the funds used to finance operations and the revenue generated from those funds. Working capital is the difference between a company's current assets, such as accounts receivable, cash, accounts, inventories and finished goods and the current liabilities, such as debt and accounts payable. The working capital turnover ratio is an efficiency or activity ratio that determines how efficiently a business utilises its working capital to generate revenue or sales. ![]() When analyzing financial ratios of several different but similar companies, a company can better understand whether it is an industry-leader or whether it is falling behind.View more jobs on Indeed View More What Is The Working Capital Turnover Ratio? How it is performing compared to its competitors.When analyzing financial ratios of a single company over time, that company can better understand the trajectory of its accounts receivable turnover. Slower turnover of receivables may eventually lead to clients becoming insolvent and unable to pay. If a company's accounts receivable turnover ratio is low, this may be an indicator that a company is not reviewing the creditworthiness of its clients enough. How sufficiently a company is evaluating the credit of clients.A company can project what cash it will have on hand in the future when better understanding how quickly it will convert receivable balances to cash. ![]()
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