Feb 3, 2023

# Net Working Capital Turnover Ratio

## What is Net Working Capital Turnover Ratio

Net Working Capital Turnover Ratio is a financial metric that measures the efficiency of a company’s management of its working capital. It is calculated by dividing a company’s net sales by its total working capital (current assets less current liabilities). This metric is useful for investors, as it tells them how quickly the company is converting working capital into sales.

## Why Net Working Capital Turnover Ratio is important

Net Working Capital Turnover Ratio is important because it provides insight into a company’s financial health and ability to generate sales from its working capital. High ratios indicate that the company is efficient in its use of working capital and has a healthy cash flow. Low ratios indicate that the company is not efficiently converting its working capital into sales.

## How Net Working Capital Turnover Ratio is calculated

Net Working Capital Turnover Ratio is calculated by dividing a company’s net sales by its total working capital (current assets less current liabilities). For example, if a software company has total sales of $50,000 and total working capital of $20,000, its net working capital turnover ratio would be 2.5 ($50,000/$20,000).

## How to improve Net Working Capital Turnover Ratio

There are several ways to improve a company’s Net Working Capital Turnover Ratio. The first is to reduce the amount of current assets, such as inventory, accounts receivable, and cash, that the company needs to operate. The second is to increase the amount of current liabilities, such as accounts payable and short-term debt, that the company can use to finance its operations. The third is to increase sales through better marketing and customer service.

## Why investor value low Net Working Capital Turnover Ratio

Investors value low Net Working Capital Turnover Ratios because it indicates that the company is inefficiently using its working capital. Low ratios may indicate that the company is not generating enough sales from its working capital, or that it is taking too long to convert its working capital into sales. This can negatively affect the company’s cash flow and may lead to liquidity issues.

How Net Working Capital Turnover Ratio relates to other financial metrics

Net Working Capital Turnover Ratio is related to other financial metrics such as return on assets (ROA) and operating profit margin. ROA measures how efficiently a company is using its assets to generate profits. Operating profit margin measures how much of a company’s sales are converted into profits. Both metrics are affected by a company’s Net Working Capital Turnover Ratio.

## Sources

Investopedia. (n.d.). Net Working Capital Turnover Ratio. Retrieved from https://www.investopedia.com/terms/n/networkingcapitalturnover.asp

Investopedia. (n.d.). Return on Assets (ROA). Retrieved from https://www.investopedia.com/terms/r/returnonassets.asp

Investopedia. (n.d.). Operating Profit Margin. Retrieved from https://www.investopedia.com/terms/o/operatingprofitmargin.asp

# Net Working Capital Turnover Ratio

## What is Net Working Capital Turnover Ratio

Net Working Capital Turnover Ratio is a financial metric that measures the efficiency of a company’s management of its working capital. It is calculated by dividing a company’s net sales by its total working capital (current assets less current liabilities). This metric is useful for investors, as it tells them how quickly the company is converting working capital into sales.

## Why Net Working Capital Turnover Ratio is important

Net Working Capital Turnover Ratio is important because it provides insight into a company’s financial health and ability to generate sales from its working capital. High ratios indicate that the company is efficient in its use of working capital and has a healthy cash flow. Low ratios indicate that the company is not efficiently converting its working capital into sales.

## How Net Working Capital Turnover Ratio is calculated

Net Working Capital Turnover Ratio is calculated by dividing a company’s net sales by its total working capital (current assets less current liabilities). For example, if a software company has total sales of $50,000 and total working capital of $20,000, its net working capital turnover ratio would be 2.5 ($50,000/$20,000).

## How to improve Net Working Capital Turnover Ratio

There are several ways to improve a company’s Net Working Capital Turnover Ratio. The first is to reduce the amount of current assets, such as inventory, accounts receivable, and cash, that the company needs to operate. The second is to increase the amount of current liabilities, such as accounts payable and short-term debt, that the company can use to finance its operations. The third is to increase sales through better marketing and customer service.

## Why investor value low Net Working Capital Turnover Ratio

Investors value low Net Working Capital Turnover Ratios because it indicates that the company is inefficiently using its working capital. Low ratios may indicate that the company is not generating enough sales from its working capital, or that it is taking too long to convert its working capital into sales. This can negatively affect the company’s cash flow and may lead to liquidity issues.

How Net Working Capital Turnover Ratio relates to other financial metrics

Net Working Capital Turnover Ratio is related to other financial metrics such as return on assets (ROA) and operating profit margin. ROA measures how efficiently a company is using its assets to generate profits. Operating profit margin measures how much of a company’s sales are converted into profits. Both metrics are affected by a company’s Net Working Capital Turnover Ratio.

## Sources

Investopedia. (n.d.). Net Working Capital Turnover Ratio. Retrieved from https://www.investopedia.com/terms/n/networkingcapitalturnover.asp

Investopedia. (n.d.). Return on Assets (ROA). Retrieved from https://www.investopedia.com/terms/r/returnonassets.asp

Investopedia. (n.d.). Operating Profit Margin. Retrieved from https://www.investopedia.com/terms/o/operatingprofitmargin.asp