Working Capital Turnover

Loading the player...

What is the 'Working Capital Turnover'

The working capital turnover is a measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales.

Working Capital Turnover

BREAKING DOWN 'Working Capital Turnover'

A company uses working capital (current assets - current liabilities) to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales.

For example, if a company has current assets of $10 million and current liabilities of $9 million, its working capital is $1 million. When compared to sales of $15 million, the working capital turnover ratio for the period is 15 ($15M/$1M). When used in fundamental analysis, this ratio can be compared to that of similar companies or to the company's own historical working capital turnovers.

RELATED TERMS
  1. Working Capital

    Working capital is a measure of both a company's efficiency and ...
  2. Asset Turnover Ratio

    The amount of sales generated for every dollar's worth of assets ...
  3. Days Working Capital

    An accounting and finance term used to describe how many days ...
  4. Working Capital Management

    A managerial accounting strategy focusing on maintaining efficient ...
  5. Efficiency Ratio

    Ratios that are typically used to analyze how well a company ...
  6. Turnover Ratio

    The percentage of a mutual fund or other investment vehicle's ...
Related Articles
  1. Economics

    Explaining Working Capital Turnover

    Working capital turnover is a ratio that helps show how efficiently a company is generating revenue per dollar of cash available to spend on operations.
  2. Economics

    Calculating Days Working Capital

    A company’s days working capital ratio shows how many days it takes to convert working capital into revenue.
  3. Fundamental Analysis

    How to Calculate a Turnover Ratio

    A turnover ratio measures a mutual fund’s level of trading activity in a given time period, usually a year.
  4. Fundamental Analysis

    Advantages of Maintaining Low Working Capital

    Understand the benefits and advantages of maintaining low working capital as related to liquidity needs, capital allocation and operational efficiency.
  5. Professionals

    Operating Efficiency Ratios

    CFA Level 1 - Operating Efficiency Ratios. Learn the three operating efficiency ratios. Includes definitions and formulas for total asset, fixed-asset and equity turnovers.
  6. Investing

    Asset Turnover Ratio

    Investopedia explains: The asset turnover ratio is a measure of a company's ability to use its assets to generate sales or revenue, and is a calculation of the amount of sales or revenue generated ...
  7. Personal Finance

    AR & Inventory Turnover Is Key For These Sectors

    Accounts receivable and inventory turnover are two important ratios in the current asset category. We will also discuss the key industries that benefit from a thorough understanding of these ...
  8. Investing

    Understanding Turnover

    Turnover has a number of different, but related, meanings depending on the context in which it is used. Generally, it means the number of times an item is replaced with a new or similar version ...
  9. Fundamental Analysis

    Reading The Inventory Turnover

    Inventory turnover is a ratio that shows how quickly a company uses up its supply of goods over a given time frame. Inventory turnover may be calculated as the market value of sales divided by ...
  10. Fundamental Analysis

    Understanding Activity Ratios

    Activity ratios measure how effectively a business uses its assets.
RELATED FAQS
  1. Can a company's working capital turnover ratio be negative?

    Learn how the working capital turnover ratio turns negative as a result of a company's negative working capital when current ... Read Answer >>
  2. What can working capital turnover ratios tell a trader?

    Find out how to calculate and interpret a company's working capital turnover ratio. Learn why a high ratio is good but an ... Read Answer >>
  3. How can an investor determine the efficiency of a company's working capital management?

    Learn how working capital is vital to a company’s survival. Also learn key metrics investors use to assess how efficiently ... Read Answer >>
  4. What ratios are most commonly used to judge working capital management?

    Learn about the various working capital ratios that investors and analysts consider when evaluating a company's financial ... Read Answer >>
  5. Does working capital include stock?

    Discover what a company's working capital is and what it includes, how it is used, and what positive and negative figures ... Read Answer >>
  6. What does a low working capital ratio show about a company's working capital management?

    Find out the significance of working capital management for a company and look at the working capital ratio analysts use ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center