Working Capital Turnover

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What is Working Capital Turnover?

Working Capital Turnover measures how efficiently a company uses its working capital to generate sales, calculated as revenue divided by average working capital.

How do you interpret Working Capital Turnover?

Working Capital Turnover measures how effectively a company uses its working capital to generate revenue, calculated as revenue divided by average working capital, reflecting operational efficiency.

How to Calculate Working Capital Turnover?

The ratio is calculated by dividing total revenue by average net working capital.

Working Capital Turnover = Revenue / Average Working Capital

where - Revenue refers to total sales generated by the company during the period.

  • Average Working Capital is calculated as (Beginning Working Capital + Ending Working Capital) / 2.

Why is Working Capital Turnover important?

It is an important measure of operational efficiency, showing how well a company is managing its short-term assets and liabilities to support its sales. A high ratio reflects better utilization of working capital, which improves cash flow and reduces the need for external financing.

How does Working Capital Turnover benefit investors?

Investors use this ratio to assess how efficiently a company is managing its working capital. A higher ratio is generally favorable as it indicates effective use of resources to generate revenue, potentially leading to better profitability and reduced cash flow risk.

Using Working Capital Turnover to Evaluate Stock Performance

A high working capital turnover ratio indicates that a company is using its resources efficiently to generate sales, which can contribute to stronger profitability and positive stock performance. Conversely, a declining ratio may signal inefficiency, which can hurt stock value.


FAQ about Working Capital Turnover

What is a Good Working Capital Turnover?

A good ratio depends on the industry, but in general, higher ratios are preferred. Industries with high turnover, such as retail, often have higher working capital turnover ratios, while capital-intensive industries, like manufacturing, may have lower ratios.

What Is the Difference Between Metric 1 and Metric 2?

While Working Capital Turnover focuses on the efficiency of using short-term assets and liabilities, Fixed Asset Turnover evaluates how well a company is using its long-term fixed assets to generate revenue.

Is it bad to have a negative Working Capital Turnover?

Yes, a low ratio can indicate that the company is not efficiently using its working capital to generate sales, possibly resulting in excess inventory, slow receivable collections, or inefficient cash management.

What Causes Working Capital Turnover to Increase?

The ratio increases when the company generates more revenue without a proportional increase in working capital. This could be the result of better inventory management, faster receivable collections, or extended payment terms with suppliers.

What are the Limitations of Working Capital Turnover?

The ratio does not account for the quality of working capital components, such as whether receivables are collectible or if inventory is overstocked. It also varies significantly across industries, making cross-industry comparisons difficult.

When should I not use Working Capital Turnover?

This ratio may be less relevant for companies with minimal working capital, such as service-based businesses, or for businesses where working capital is not a significant driver of sales.

How does Working Capital Turnover compare across industries?

Working capital turnover ratios differ widely by industry. For example, retail and service-based companies typically have higher ratios due to lower working capital needs, while capital-intensive industries like manufacturing may have lower ratios due to higher working capital requirements​​.


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