Working capital turnover ratio reflects how effectively the company is using its working capital. Working capital turnover ratio measures how much revenue a company generates from every dollar of capital invested during a year.
Formula
Check your understanding of this lesson with a short quiz.
Example
Assume that a company has $1.2 million in sales for the year. Its current assets were $700,000, and current liabilities were $500,000. The working capital will be $200,000 ($700,000 - $500,000).
The working capital turnover ratio will be $1,200,000/$200,000 = 6.
Interpretation
A working capital turnover ratio of 6 indicates that the company is generating $6 for every $1 of working capital.
Analysis
While analyzing a company, this ratio is compared to that of its peers, and/or its own historical records.
A high working capital turnover is considered good as it indicates that the company is generating good sales compared to the funds invested in operations, i.e., the company is very efficient.
For some companies, there may be very low working capital, in which case this ratio will be useless. Such companies will use other ratios such as Fixed Asset Turnover or Total Asset Turnover.
