A working capital turnover ratio, also referred to as “net sales over working capital”, or the net sales divided by working capital, is an indication of a company’s effectiveness in using working capital.
Working capital is defined as the total amount of current assets minus the total amount of current liabilities. You should use the average amount of working capital for the 12-month period used to calculate net sales. With most financial ratios, you should compare working capital turnover ratio to other companies in the same industry because every industry has different business fundamentals.
Working capital turnover ratio example
You can use the working capital turnover ratio to figure out the net annual sales generated by the average amount of working capital during a 12-month period. For example, if a company sold $5 million worth of products and services, and it had a million dollars in working capital, the company’s working capital turnover ratio would be five because it’s five million dollars ($5,000,000) in net annual sales divided by one million ($1,000,000).
The company’s working capital is a function of the size of the company. A smaller company with less assets with the same amount of revenue means they’re going faster.