The NWC turnover ratio can be interpreted as the dollar amount of sales created for each dollar of working capital owned. How to Interpret Working Capital Turnover Ratio (NWC) However, unless the company’s NWC has changed drastically over time, the difference between using the average NWC value compared to the ending balance value is rarely significant. In order to match the time period of the numerator with that of the denominator, using the average NWC balances between the beginning and ending periods is recommended. The sales of a business are reported on its income statement, which tracks activity over a period of time. Working Capital Turnover = Net Sales / Net Working Capital (NWC).The formula for calculating the NWC turnover is as follows. ![]() Non-Operating Liabilities → Debt and any interest-bearing securities are also removed because they represent financial liabilities.Non-Operating Assets → Cash and cash equivalents like marketable securities are excluded in the calculation of NWC.current assets minus current liabilities – the net working capital (NWC) is a more practical measure since only operating assets and liabilities are included. While the working capital metric can be used – i.e. “turnover”) must be divided by its net working capital (NWC). In order to calculate the turnover ratio, a company’s net sales (i.e. The NWC turnover metric can be a useful tool for evaluating how efficiently a company is utilizing its working capital to produce more revenue. The working capital turnover ratio compares a company’s net sales to its net working capital (NWC) in an effort to gauge its operating efficiency. How to Calculate Working Capital Turnover (Step-by-Step) The usefulness of this ratio can be increased by comparing it with the ratio of other companies, industry standards and past years.The Working Capital Turnover is a ratio that compares the net sales generated by a company to its net working capital (NWC). Generally, a high fixed assets turnover ratio indicates better utilization of fixed assets and a low ratio means inefficient or under-utilization of fixed assets. Company Y is, therefore, more efficient than company X in using the fixed assets. Generally speaking the comparability of ratios is more useful when the companies in question are in the same industry.Ĭompany Y generates a sales revenue of $4.53 for each dollar invested in fixed assets where as company X generates a sales revenue of $3.16 for each dollar invested in fixed assets. The ratio of company X can be compared with that of company Y because both the companies belong to same industry. ![]() Calculation of fixed assets turnover ratio: Can we compare the ratio of company X with that of company Y? If yes, which company is more efficient in using its fixed assets?.Calculate fixed assets turnover ratio for both the companies.The selected data for both the companies is give below: X and Y are two independent companies that manufacture office furniture and distribute it to the sellers as well as customers in various regions of USA. In such a case, closing balance of fixed assets rather than average assets may be used as denominator of the formula. Note for students: Sometime opening balance of fixed assets may not be given in the question. ![]() It is computed by dividing net sales by average fixed assets. Fixed assets turnover ratio (also known as sales to fixed assets ratio) is a commonly used activity ratio that measures the efficiency with which a company uses its fixed assets to generate its sales revenue.
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