"Working Capital Leverage measures the sensitivity of return on investment in working capital." Comment with example.

Working capital leverage is used to locate the investment in working capital or current assets in the company. Working capital leverage measures the sensitivity of return on investment to changes in the level of current assets. It can be calculated as under: Working capital leverage = percentage change in ROI / percentage change in working capital If the earnings are not affected by the changes in current assets, the working capital leverage can be calculated with the help of the following formula. Working capital leverage = Current assets / Total assets - Changes in level of Current assets For example: M/s X has Total assets including Current assets as ₹14 lakh, and current assets are ₹4 lakh. Management is expecting 30% change in the level of current assets. In such case, working capital leverage can be calculated as under: Working capital leverage = Current assets / Total assets - Changes in level of Current assets = 4,00,000 / 14,00,000 - 1,20,000 = 0.3125