Some analysts prefer to invert working capital per dollar of sales into a financial metric known as working capital turnover. 5 to 2.0: Short-term liquidity is optimal. Higher the capital turnover ratio better will be the situation. The higher your working capital turnover ratio is, the more efficient you are in using working capital to generate sales, but a very high working capital turnover ratio can show that a company does not have enough capital to support its sales growth. This ratio is also known as net sales to working capital and shows the relationship between the revenue generated by the company and the funds needed to generate this revenue. It’s calculated by dividing sales by total equity. The working capital turnover is the ratio that helps to measure a company's efficiency in using its working capital to support sales. This may also be referred to as a negative working capital ratio. This problem is most obvious if there is a low inventory turnover ratio . Working capital turnover ratio is an activity ratio that measures dollars of revenue generated per dollar of investment in working capital. Another common efficiency ratio and capacity ratio is the equity turnover ratio. Solution: Working Capital Turnover Ratio is calculated using the formula given below Formula to calculate capital turnover ratio = Sales/ Capital Employed Calculate the working capital turnover ratio of a Company ABC Inc. which has a net sales of \$ 100,000 over the past twelve months and the average working capital of the Company is \$ 25,000. To calculate working capital turnover, you take the working capital per dollar of sales and divide it into one. For example, in the case of Johnson & Johnson, you'd take 1 ÷ .46 to arrive at 2.17. Working Capital Turnover Ratio is used to determine the relationship between net sales and working capital of a business. 5. Liquidity problems are likely in the near or immediate future. Working Capital Turnover . A working capital ratio can be evaluated as follows: Less than 1.0: A company cannot meet its current financial obligations. Working capital is defined as the amount by which current assets exceed current liabilities. A higher working capital turnover ratio is better. Therefore, its working capital turnover ratio was: net sales of \$2,400,000 divided by average working capital of \$400,000 = 6 times during the year. Companies may perform different types of analysis such as trend analysis, cross-sectional analysis, etc. It shows the number of net sales generated for every single unit of working capital employed in the business. A high capital turnover ratio indicates the capability of the organization to achieve maximum sales with minimum amount of capital employed. Working Capital Turnover Ratio. Working Capital Turnover Ratio – Example #2. The working capital turnover ratio is an activity ratio that measures how many times working capital is used to generate sales, ie revenue, during a specific time period. Working Capital Turnover. From the Balance Sheet of Bill Energy Limited (Listed Company), Calculate the Working Capital Turnover Ratio for Five Years and Interpret the same. As with most financial ratios, you should compare the working capital turnover ratio to other companies in the same industry and to the same company's past and planned working capital turnover ratios. The working capital ratio can be misleading if a company’s current assets are heavily weighted in favor of inventories, since this current asset can be difficult to liquidate in the short term. Equity Turnover Ratio. A working capital turnover ratio is generally considered high when it is greater than the turnover ratios of similar companies in the same industry. 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