Financial Ratio Analysis - Working Capital Turnover

Working Capital Turnover

The final ratio in this section is the working capital turnover ratio - the relationship between turnover and working capital.

The working capital turnover ratio is straightforward and here it is!

Working Capital Turnover =     Sales    
Working Capital

What this ratio tries to highlight is how effectively working capital is being used in terms of the turnover it can help to generate: no ideal values here but the higher the better, surely. Working with the Carphone Warehouse, we have:

Carphone Warehouse 31 March 2001 25 March 2000
  £'000 £'000
Turnover 1,110,678 697,720
Net current assets (liabilities) 93,180 -2,660

Working Capital Turnover Ratio for the Carphone Warehouse
31 March 2001 1,110,678
93,180
11.92 times
25 March 2000 697,720
-2,660
-262.30 times

Oops, then much better! In 2000, the result of the working capital turnover ratio was strange because year-end working capital (net current liabilities in this case) was negative - it's difficult to interpret such a ratio. In 2001, though, it had turned this situation round and returned a value of 11.92 times.

The best way to understand what this ratio means is to calculate it a few times. Let's start with Vodafone and take it from there.

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