What is working capital turnover ratio?
Working Capital Turnover Ratio (WCTR) is one of the key metrics that banks use to determine whether or not they should lend money to you. In simple terms, WCTR measures how much cash flow your company has compared to its total assets. If your WCTR is higher than 100%, then your company is generating more income than it spends, and therefore it has sufficient funds to pay back loans.
Working capital is defined as the current assets minus current liabilities. Current assets include cash on hand, inventory, accounts receivable, prepaid expenses, and investments.
Current liabilities include short-term debt such as bank loans, trade debts, and other long-term liabilities. When calculating working capital, banks take into account the amount of cash your company generates from sales, and compare it against the amount of cash your business spends on operating costs. The difference between these two numbers is your working capital.
A high WCTR indicates that your company is generating enough cash to cover its expenses. This means that your company can continue to operate without having to borrow additional funds.
On the contrary, a low WCTR means that your company is spending too much money on operations, and thus it cannot afford to repay loans. For example, a restaurant may have a high WCTR because it sells expensive items, but has little cash on hand.
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