A:

A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. The working capital turnover is calculated by taking a company's net sales and dividing them by its working capital. Since net sales cannot be negative, the turnover ratio can turn negative when a company has a negative working capital.

Working Capital

A company maintains its working capital to finance its operations, such as purchasing inventory, collecting its accounts receivable and paying its vendors. If a company takes too much credit from its vendors or delays payments on its other obligations, such as salaries and taxes, the company's current assets may be insufficient to pay off its current liabilities. In this case, working capital turns negative, meaning that a company must raise funds immediately by either borrowing money or selling more of its products for cash to satisfy its current obligations.

Working Capital Turnover Ratio

The working capital turnover ratio shows the relationship between the funds used to finance a company's operations and the revenues a company generates as a result of conducting these operations. A higher working capital turnover ratio indicates that a company generates a higher dollar amount of sales for every dollar of the working capital used.

When the working capital turns negative, so does the working capital turnover ratio. Because a company's sales cannot be negative, only negative working capital makes the working capital turnover ratio negative. A negative working capital turnover ratio is typically meaningless and cannot be compared across companies.

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