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.

RELATED FAQS
  1. 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 >>
  2. What is considered a good turnover ratio for a mutual fund?

    Understand what the concept of turnover ratio represents in relation to a mutual fund, and how an investor can evaluate a ... 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. Can Working Capital be Negative?

    Negative working capital can arise under certain circumstances. Working capital can be negative if a company's current assets ... Read Answer >>
  5. 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 >>
  6. 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 >>
Related Articles
  1. Investing

    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.
  2. Managing Wealth

    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 ...
  3. Financial Advisor

    What Is Portfolio Turnover?

    Portfolio turnover measures a fund’s percentage of assets that are bought and sold by its manager over a year.
  4. Investing

    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 ...
  5. Investing

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  6. Investing

    Receivables Turnover Ratio

    The receivables turnover ratio is a measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. Learn more about it here.
  7. Investing

    Liquidity Measurement Ratios

    Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
  8. Investing

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
RELATED TERMS
  1. Working Capital Turnover

    A measurement comparing the depletion of working capital to the ...
  2. Asset Turnover Ratio

    Asset turnover ratio measures the value of a company’s sales ...
  3. Receivables Turnover Ratio

    Receivables turnover ratio is an accounting measure used to quantify ...
  4. Days Working Capital

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

    A managerial accounting strategy focusing on maintaining efficient ...
  6. Turnover

    Turnover is an accounting term that calculates how quickly a ...
Hot Definitions
  1. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  2. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  3. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  4. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  5. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  6. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
Trading Center