Calculate the Working Capital Turnover Ratio

By Stock Research Pro • March 16th, 2009

The Working Capital Turnover Ratio provides a measure to compare the depletion of working capital to the generation of sales over a specific period of time. The ratio provides investors with a look at how effectively a company is leveraging its working capital to generate sales. High or increasing working capital turnover is generally a good sign as it shows that either the company is achieving greater sales with the same or a lesser amount of working capital or it has been able to maintain its sales with reduced working capital. Each of these cases can be reflective of the company successfully streamlining its operations.

What is Working Capital?

Working capital represents the money available to a business to run its daily operations and, as such, it is used to measure of the efficiency and the short-term financial health of a company.

Working capital is a simple balance sheet equation expressed as:

Working Capital = Current Assets – Current Liabilities

As positive working capital indicates the ability of the company to pay off its short-term liabilities almost immediately, negative working capital may suggest that the company is too highly leveraged or is dealing with revenue generation or collections issues. Working capital is a liquidity measure. A business might that shows a profit, without the ability to maintain a positive cash position, business cannot continue to operate. Often, this is an inventory turnover issue as inventory that sits in the company’s warehouse ties up its working capital.

Calculate Working Capital Turnover

Working Capital Turnover = Sales / Working Capital

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How to Use the Calculator

To collect the information you will need to perform the working capital turnover calculation, go to Yahoo! Finance and enter the stock symbol. Collect the current assets and current liabilities information from the Balance Sheet. Collect the revenue information from the Income Statement.

This ratio is most valuable when viewed over multiple time periods or when compared to other companies in the same industry. Generally speaking, the higher the working capital turnover, the better.

Working Capital Needs Vary by Industry

Companies, such as grocery stores, that have high inventory turnover and do business on a cash basis need very little working capital. Because these companies can raise cash so quickly, they do not need to have a large amount of working capital available.

Companies that sell any type of heavy machinery or other types of expensive items are not able to raise cash as quickly. These types of companies must keep sufficient working capital on hand to manage unforeseen challenges.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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