## A company earns Gross Profit of 25% on cost. For the year ended 31st March, 2017 its Gross Profit was Rs. 5,00,000; Equity Share Capital of the company was Rs. 10,00,000; Reserves and Surplus Rs. 2,00,000; Long-term Loan Rs. 3,00,000 and Non-current Assets were Rs. 10,00,000. Compute the ‘Working Capital Turnover Ratio’ of the company.

SOLUTION

Working Capital Turnover Ratio = Revenue from Operation / Working Capital
Gross Profit = 25% on Cost
Let Cost of Goods sold be Rs. 100.

Gross Profit = Rs. 25

Revenue from Operations = (100 + 25) =  Rs. 125
When Gross profit is Rs. 25, revenue from operations is = Rs. 125
And, if Gross profit is Rs. 5,00,000 then revenue from operations will be = Rs. (5,00,000 × 125 / 25) = Rs. 25,00,000

Capital Employed = Shareholder’s Funds + Non-Current Liabilities
= (10,00,000 + 2,00,000 + 3,00,000)
= Rs. 15,00,000

Also,
Capital Employed = Non-Current Assets + Working Capital
Alternatively, Working Capital = Capital Employed – Non-current Assets
= (15,00,000 – 10,00,000)
= Rs. 5,00,000

Hence, Working Capital Turnover Ratio = 25,00,000 / 5,00,000
= 5 times