Working Capital Turnover

Working capital turnover ratio is an activity ratio that measures dollars of revenue generated per dollar of investment in working capital. Working capital is defined as the amount by which current assets exceed current liabilities.

A higher working capital turnover ratio is better. It means that the company is utilizing its working capital more efficiently i.e. generating more revenue using less investment.

Formula

Working Capital Turnover Ratio
=Revenue
Average Working Capital

Working Capital = Current Assets − Current Liabilities

Average Working Capital
=Opening Working Capital + Closing Working Capital
2

Example

Calculate and analyze the working capital turnover ratios of General Electric (NYSE: GE), United Technologies Corporation (NYSE: UTX) and Amazon Inc. (NYSE: AMZN) for financial year 2012. Relevant extracts from their financial statements are given below. All amounts are in USD in million.

GEUTXAMZN
Revenue147,35957,70870133
Current Assets428,72929,61021296
Current Liabilities221,40323,78619002

Solution

The following schedule contains the required calculations:

GEUTXAMZN
Revenue (A)147,35957,70870,133
Current Assets (B)428,72929,61021,296
Current Liabilities (C)221,40323,78619,002
Working capital (D)[= B − C]207,3265,8242,294
Working capital turnover (A ÷ D)0.719.9130.57

Since GE and UTX are competitors, working capital turnover ratio can be used to compare their asset utilization. UTX is clearly using its investment in working capital more efficiently as indicated by its higher working capital turnover ratio when compared to GE's ratio.

AMZN on the other hand is not a competitor of GE or UTX so comparison between GE/UTX and AMZN based on working capital turnover ratio is not appropriate.

Further, AMZN's industry and its market position is such that it can maintain very low working capital. In such a situation working capital turnover ratio is not very useful. Fixed asset turnover and total asset turnover ratio should be used in such scenarios.

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork